Question

1. You mention that an investor takes on the role of the creditor in securitization. How does this work with servicers involved? Does the investor initiate collection action themselves, or do they need to go through the servicer?

2. Small investors coming into play with securitization - did you find a certain example or scenarios when these companies can get involved with this process?

Answer 1

Securitization

Securitization is the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group. The issuer then sells this group of repackaged assets to investors. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace.

Investors buy the securities issued by the SPV and are, therefore, entitled to receive the repayments and interests based on the cash flow generated by the underlying assets. Collaterals ensure the pecuniary claims from these assets. The largest investors in securitised assets are typically pension funds, insurance companies, investment fund managers, and to a lesser degree, commercial banks. The most compelling reason for investing in Asset-Backed Securities is their higher rate of return relative to other assets of comparable credit risk.