Question

whats securitization of a loan ? in simple terms

Answer 1

Securitization is a process through which you convert an illiquid asset into a liquid asset meaning it can be sold or it can used to raise funds against them. Securitization of loans is done by creating a special purpose unit where a completely different units takes care of the all the cash flow associated with the loans and repackages them in such a way that it can be sold to investors.

Let’s take a simple example of a trading account, and you own 100 shares of Apple, Now since you own the shares, it is actually lying into your account, if the price of apple increases you gain or if dividend is paid you receive dividend but you can pledge your shares with your broker and the broker can actually give you more margin in place of that, meaning that you can buy more shares or shares that you have pledged can be used to lend and can act as a loan. There is no special purpose vehicle (SPV unit) involved but this is a simple way to look at securitization. It simply converts the asset which are lying with you as liquid or tradeable asset.