Executive Summary
Securitization creates value for organizations, investors, and consumers:
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It separates the funding of receivables from their origination and servicing, and allows origination and servicing revenues to grow without additional balance sheet financing.
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It provides cash flow and balance sheet management benefits.
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It allows for targeted asset liquidation, improvements in asset liquidity, and access to capital markets at rates different from enterprise credit ratings.
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The flexibility in transforming risks permits mutually beneficial matches in targeted market opportunities, both for organizations and investors.
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Deeper capital markets allow for price discovery of illiquid assets, greater access to funds for new firms and consumers, and greater financial innovation.
Securitization creates risks of moral hazard and lack of transparency:
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Separation of funding from origination can create moral hazard, generating higher-than-expected risks and leading to conflicts between investors, firm shareholders, and firm creditors.
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Complexity of structural transformations creates lack of transparency, which, in turn, can lead to greater illiquidity and possible market failure. These effects are worse in globally inter-connected markets.
Introduction
In broad terms, securitization can be viewed as pooling receivables and selling claims to these receivables in capital markets. For example, a mortgage lender may pool together thousands of mortgages and sell claims on mortgage receivables to investors. Historically, the first securitizations in the 1970s in the United States were those of pools of mortgages. With the success of mortgage-backed securities, other groups of receivables were securitized as well, including auto loan receivables, credit card receivables, and home equity receivables.
Although a majority of securitizations are of receivables on consumer debt1 (whether mortgage or nonmortgage), in principle, any cash flow receivable can potentially be securitized. There are several so-called “exotic” securitizations—for example, securitization of mutual fund fees, movie revenues, tobacco settlement fees, and even music royalties. Moreover, student loans, manufactured housing loans, equipment leases, and commercial mortgages are also securitized.
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