Question

1. What key challenge faced by companies in the mortgage lending business, for example Housing Finance, would mortgage-backed securitization help solve?

Answer 1

Mortgage Lending Business has been long known in various countries. The mortgage lending business, in layman's language, implies providing loans to borrowers secured by collateral security. The borrower is obliged to pay back the loan amount with the pre-set terms and conditions and timelines.

The major challenge faced by companies in this business is the repayment of the loan amount that is, the borrower will not pay the loan installment as agreed upon (due to various reasons) and later on the lender will be declaring them as Bankrupt and so cannot recover the loan amount from the borrowers. The best example is the Sub-Prime Mortgage crisis faced by USA Home Loan market long ago. The major challenge here was the assumption that the house property prices can only go up and people took heavy loans to purchase a house and later were unable to pay it back and the Banks had to face lot of crisis because borrowers were unable to pay back the loan amounts and how much loss can any bank handle.

Mortgage-Backed securitization might help in such scenarios because Banks/ financial institutions have something to fall back on to recover their losses as much as possible. Mortgage-backed securitization implies that it is asset-backed security secured by a mortgage or a collection of mortgages sold to an individual or a group of individuals (Banks/ Government agencies or financial institutions) that investors can buy.