Question

1. What is securitization?
2. What are the steps involved in securitization of loans? Explain briefly.
3. What is a Mortgage Back Security (MBS)?
4. Discuss at least one of the driving forces of securitization?
5. What is a repo agreement? Briefly explain.
6. Do you think government bailout of financial institutions during financial crisis of 2008 can increase moral hazard? Explain your answer.
7. Why failure of (commercial) banks and many other financial intermediaries (such as investment banks) can lead to a recession, such as the one observed after 2008 financial crisis? (Hint: your answer should relate to role of financial intermediaries and asymmetric information).

Answer 1

Ans. Securitization is the process of taking an illiquid asset or group of assets and, through financial engineering, transforming it (or them) into a security. A typical example of securitization is a mortgage-backed security (MBS), a type of asset-backed security that is secured by a collection of mortgages. Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling them to third parties in form of securities. These securities are backed by mortgages that are kept as basis for issuing these securities. Banks sells there loans to securitization trust and receive money for those loans in lump sum. Securitization trust collects funds from investors and pay revenues to investors from interest received from mortgages. All the risk and rewards of mortgages are transferred to securitization trust. However, banks collects interest from customers and pay to trust.   

Note: As per answering rules only one question is answered. If you want solution of other questions, please upload them separately.