Lesson 1 of 5 · 12 min
What securitization is and the main structures
Securitization moves a pool of cash-generating loans or receivables into a separate legal entity, which issues securities that are repaid from that pool's cash flows.
In short
- Securitization: pool loans or receivables, transfer them from the original lender to a specially created legal entity, and issue securities backed by and repaid from the pool.
- The pool is called the securitized assets, the reference portfolio or the collateral. The securities are asset-backed securities (ABS).
- From simplest to most complex: covered bonds → pass-through securities → bonds with structural enhancements.
- Covered bonds are not full securitizations: the pool stays on the bank's balance sheet and the bank pays investors.
- Mortgage-backed securities (MBS) are ABS backed by mortgages; in the US the term ABS is often kept for non-mortgage collateral.
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