Question

In: Finance

3.   What are the effects of securitization on the liquidity in the mortgage market? How does...

3.   What are the effects of securitization on the liquidity in the mortgage market? How does securitization affect mortgage originating banks’ lending activities on the positive and negative sides, respectively?

Solutions

Expert Solution

Securitization involves taking with an illiquid asset and polling it with other assets with a view to create more liquid asset which could be easily transeferred to third party.Securitization helps in improvement of liquidity in mortgage markets as it helps in transforming illiquid assets into liquid assets without affecting much of it's price.

Securitization affects the mortgage originating banks on the positive side as a bank can use securitization to convert a portfolio of mortages into cash.When a bank underwrites a mortage ,it owns the right to the future stream of income provided by the borrower repaying the loan so it can be said that securitization helps in creating an asset in books of accounts. Through the help of securitization , Bank can help itself by reducing it's position in overall illiquid assets and increasing it's position in more liquid assets.

One of the disadvantages related with securitization is that is it encourage banlks to lend to the high risk people and it is motivating as the risk is transferred to the investors.It is also a remarkably complex process and government intervention is also involved sometimes.


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