Securitization and asset-backed securities

Perhaps the best illustration of the flexibility, innovation, and user-friendliness of the debt capital markets is the rise in use and importance of securitization. As defined in Sundaresan (1997), securitization is a framework in which some illiquid assets of a corporation or a financial institution are transformed into a package of securities backed by these assets, through careful packaging, credit enhancements, liquidity enhancements and structuring.  

The fiexibility of securitization is a key advantage for both issuers and investors. Financial engineering techniques employed by investment banks today enable bonds to be created from any type of cash flow. The most typical such flows are those generated by high-volume loans such as residential mortgages and car and credit card loans, which are recorded as assets on bank or financial house balance sheets. In a securitization, the loan assets are packaged together, and their interest payments are used to service the new bond issue. 

In addition to the more traditional cash flows from mortgages and loan assets, investment banks underwrite bonds secured with flows received by leisure and recreational facilities, such as health clubs, and other entities, such as nursing homes. Bonds securitizing mortgages are usually treated as a separate class, termed mortgage-backed securities, or MBSs. Those with other underlying assets are known as asset-backed securities, or ABSs. The type of asset class backing a securitized bond issue determines the method used to analyze and value it. 

The asset-backed market represents a large and diverse group of securities suited to a varied group of investors. Often these instruments are the 

The market in structured finance securities was hit hard in the wake of the 2007—2009 financial crisis. Investors shunned asset-backed securities in a mass flight to quality. As the global economy recovered from recession, interest in the securitization resumed. We examine the fallout in the market later in this chapter. First, we discuss the principle concepts in undertaking securitization. 

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Investment Company Act, Release No. 19105, [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1 85,062, at 83,500 (Nov. 19, 1992) (provided in connection with the issuance of Rule 3a-7 under the Investment Company Act of 1940). The terms "securitization," "asset secu-ritiMtion," and "structured finance" are used interchangeably. Each refers to a company s use of cash flows from its assets to raise funding. The term "securitization" specifically refers to the issuance Oi securities backed by such cash flows. 

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