Example Of Securitization

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The concept of securitisation is a process in which individual loans, receivables or claims are pooled together, under written and issued to investors in the form of market securities. The assets appearing in the financial statements of an institution and long term receivables are made liquid by issuance of marketable securities against them. Cash generated from a mix of assets is converted to negotiable instruments or assignable debt bonds which can be sold to investors. This is known as securitization because the form of instruments used in the process to obtain funds from the investors is securities.
Let us understand securitisation through an example. Bank ABC has given housing loans to 10 people at Rs100, 000 which can be used by them
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The U.S. government wanted to make this American dream accessible to a lot more people. So, it tried to find how to increase liquidity in the mortgage market as a matter of policy. So, in 1970 the first housing mortgage-backed security was issued by Ginnie Mae. In 1968, U.S. Congress split Federal National Mortgage Association (Fannie Mae) into two separate corporations, FNMA and GNMA. As a result of which, Ginnie Mae was created under the Housing Act. It made a pool of mortgage loans and allowed them to be used as collateral for securities sold in the secondary market. The need of this was to help channelling of investment capital from investors and providing extensive capital for housing at an affordable rate. In the year of 1970, the secondary mortgage market was also expanded by Congress by putting in place the Emergency Home Finance Act. It created the Federal Home Loan Mortgage Corporation (Freddie Mac) to help in mitigating interest rate risk by purchasing mortgages from the thrifts. Fannie Mae and Freddie Mac were also endowed with authority by the act to buy and sell mortgages insured or guaranteed by the U.S. federal government. The first mainstream loan securitisation was issued in 1971 by Freddie Mac. In the year of 1977, Bank of America…show more content…
In India, the first securitisation deal was rated by CRISIL 1991. Citibank securitised a pool from its automobile loan portfolio and placed it with GIC Mutual Fund. Since then, securitisation has become a significant option of raising funds by corporations. A few transactions of well-rated organizations have already taken place in India. Some of the transactions which took place involved sale of hire purchase or loan receivables of Non-banking financial companies which were from auto-financing activity. But now even service industries and manufacturing corporations are looking forward to securitise their receivables. They are also looking forward to securitise future cash

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