FIN 701 Lecture Notes - Lecture 4: Freddie Mac, Special Purpose Entity, Government National Mortgage Association
13 Apr 2016
School
Department
Course
Professor
Document Summary
Securitization: packaging and selling of loans and other assets backed by securities: many types of loans and assets are being repackaged in this fashion including, original use was to enhance the liquidity of the residential mortgage market. Securitization involves: o o o creation of a new entity (special purpose vehicle or spv) to purchase the asset creation of a marketable security for public distribution credit enhancement: Spv obtains 100% debt financing through credit enhancement: over-collateralization, standby letters of credit seller retains some credit risk. Securitization improves the risk-return trade-off for fis. Securitization: sale of assets to a new legal entity (special purpose vehicle or spv) which finances the purchase with new securities. Most common assets: mortgage loans, consumer, home equity loans, credit card receipts, trade receivables, auto loans and leases. Securitization is possible and cost-effective if: o o. Large size to cover costs: verifiable credit risk: bond ratings o. Sold without recourse, removed from originating fi"s books.
