Securitization

It is a process by which the illiquid asset or groups of illiquid assets are converted into a security with the help of financial engineering. It is a recently formed financial practice. In another definition it is defined as the practice by which the various types of contractual debt like various form of mortgage, credit card debt and auto loans are pooled together to form a bond which are then sold to investors. The asset backing these loans and debts are the primary factors that determine the demand for such security. If the asset that backs these debts is of lower risk then the demand will be more for such security among the investors. Many investors go for such security in order to gain from the merger of various assets into a single collateralized debt. This type of investment is a huge hit among investors because of the fact that investors like to take risk on a herd of asset rather than taking risk on a single asset.

The credit quality of such security is not fixed. It keeps on varying with time. If the asset performs in the expected line then the value increases. If the asset performance is not inline with the expectation the value of the security decreases. The evolution of the securitization process started in the late 70’s

The following facts are to be considered when these types of security are created they are,

• The originator is a person who owns the asset and is in need of fund to enhance his business. The originator can raise money by either getting a loan or a debt or mortgage. The above methods are less profitable to the originator than the securitization method.
• The investors are the one who purchase these securities. They purchase these securities by analyzing the credit rating of the originator, the business running ability of the originator etc.
• The issuer is a person who is in between the investors and originator.

These securities are either sold directly to the institutional investors are through market to the retail investors. This process is called as issuance. The main factor that are taken into consideration by the investor before purchasing these security is the credit rating of the originator.

Question

• Who is called originator in securitization process?
• What is securitization process?