Question

What is an SPV and what role does it play in the securitization process? What liabilities would exist to the originator of the loans placed in a MBS if an SPV was not used?

Answer 1

Special Purpose Vehicle - is not a machine or vehicle. Actually, a trust is created which works for an investor, takes charge of all receivables, collects the money from loanees or from electricity consumers and gives to investors. The SPV (Trust) issues an instrument call "Pass through certificate" (PTC) which provides the right to proceed on behalf of the investors to take charge of property (Assets viz. housing loan/vehicle loan, sell it and bring the proceeds to trust.

Role in securitization process:

In case the securitization involves any asset or claim which needs to be integrated and differentiated, that is, unless it is a direct and unsecured claim on the issuer, the issuer will need an intermediary agency to act as a repository of the asset or claim which is being securitized. For example, a secured debenture, in essence, is a secured loan from several investors. Here, security charge over the issuer's several assets needs to be integrated, and thereafter broken into marketable lots. For this purpose, the issuer will bring in an intermediary agency whose basic function is to hold the security charge on behalf of the investors, and then issue certificates to the investors of beneficial interest in the charge held by the intermediary. So, whereas the charge continues to be held by the intermediary, beneficial interest therein becomes a marketable security. The same process is involved in securitization of receivables, where the special purpose intermediary holds the receivables with it, and issues beneficial interest certificates to the investors.

The Securitization Company (SPV) acts as a conduit between the Originator and the investor in regard to the financial receivables. The investor is interested in the return on his investment and he is not bothered about any privity of contract between the Originator and the Obligor or between the Originator and the SPV. One of the essential features of securitization is that the receivables/financial assets are transferred to the SPV so that the beneficial interest of the SPV is created. In any case, the essential function of the SPV is that it acts as a trust which is created solely for the purpose of holding the receivables on behalf of the investor. It, thus, protects the interests of the investor as well and insulates them from the originator of financial assets.

The Securitization Company (SPV) should treat the Originator as a third party and should be managed by professionals only. The staff should be employed on regular basis and should have a thorough knowledge of the subject and the prevailing laws in force and these may be given special training in the subject.

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