Question

1. 1. What are securitized mortgages?
2. 2. What are their benefits?
3. 3. What are potential disadvantages of securitized mortgages?

Answer 1

a. A securitized mortgage is one where the loans issued by the banks like the car loan, residential, commercial mortgages or several illiquid assets and packages them into one or several MBS (mortgage backed securities) .  One mortgage can be securitized over several MBS. The banks do this to remove the debt from the balance sheet/off balance sheet financing and create liquidity on the mortgage.

The process of securitization, is explained as selling of the mortgages issued by the banks to the SPV, which in turn raises money from the investors by matching the principal and interest payments made on the loan taken from the bank to the coupon payments made to the bond investors.

B. The benefits of securitization is to reduce the funding costs , with securitization a company can easily raise money due to the existence of security/collateral. It provides diversification benefits to the investors. They transfer any risk related to the illiquid asset and also help tom generate liquidity due to securitization. It is another mode of financing.

C A disadvantage of securitization is that the mortgage rates are highly volatile than what it used to be in the past. It is difficult for the investor to correctly analyze the risk factor in the imvestor since it is several mortgages like credit card loan, commercial ,residential apckaged into one.