Loan Home Equity Loan Morgages Home Equity Loan Morgages

Www Homeequityloanmorgages Tag Tvs 2010 08 Im Weak I Know Home Equity Loan Morgages History and overview of securitization

Www Homeequityloanmorgages Tag Tvs 2010 08 Im Weak I Know Home Equity Loan Morgages

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y o Tag sell bonds to the investment community, dealers provide this service. Bonds typically trade more actively closer to their date of issue. Because bond investors—usually institutional investors such as pension funds and insurance companies—hold most bonds to maturity, trading in bonds declines as they draw nearer to their stated maturity date. The issuance volume of a certain bond, a bond's credit rating and whether it was issued publicly or privately can also affect liquidity. All ABS and MBS are traded on the dealer-based, over-the-counter markets so liquidity depends in part on the ability and willingness of dealers to maintain an inventory, or make a market, in a certain bond. Benefits of Securitization Less Expensive, More Broadly Available Credit The public benefits of securitization are evident in a number of ways. Chief among these is the contribution of securitization to lower borrowing costs both for individuals and corporations. The existence of a liquid secondary market for home mortgages increases the availability of capital to make new home loans. Financial institutions that realize the full value of their loans immediately can turn around and re-deploy that capital in the form of a new loan. This is often the most efficient way to raise new funds in the capital markets and the savings are passed on to the borrower. Consumers other than homebuyers also benefit from lower borrowing costs. Securitization can lower a firm's financing costs as well. MBS and ABS are often designed to carry a higher credit rating than the originating firm would otherwise realize for other types of bonds. Higher credit ratings mean the security is less risky and translates into a lower interest rate for the originator as investors do not demand the same risk premium. The originator passes the savings on to the consumer in the form of lower lending rates. Securitization also aids in the geographic dispersion of capital to areas that may otherwise be deprived of credit options. Traditionally, depository institutions have provided credit in the areas where they accepted deposits. By securitizing loans, however, the lender generates capital for new loans that may come from a different location. This linkage to the capital markets broadens the range of regions where depository institutions obtain capital to provide credit. By subjecting the lending decisions of financial institutions to valuation by the capital markets, securitization also encourages an efficient allocation of capital. Financial institutions and others who securitize assets depend, of course, on investors. Investors seek an appropriate return based on a level of risk. If the asset pools are not of a 6 zycnzj.com/

zycnzj.com/ www.zycnzj.com sufficient quality, for example, investors will demand a higher interest rate as compensation. At its most basic level, securitization is the process of isolating risk and repackaging it for investors. This increases efficiency in the capital market by removing intermediary steps between investors and the risk they are assuming. A money manager, for example, may be interested in a mortgage-backed bond that pays interest and principle on a monthly basis, but not in the debt securities issued by the originator of the securitized assets. Securitization reallocates risk at many levels. By shifting the credit risk of the securitized assets (for a price) to ABS and MBS investors, financial institutions can reduce their own risk. As the risk level of an individual institution declines, so does systemic risk, or the risk faced by the financial system overall. More Options for Investors As noted above, investors benefit from the legal segregation of the securitized assets. The segregation protects the payment stream on the MBS and ABS from a bankruptcy or insolvency. Higher-rated securitized instruments generally offer higher yields than similar sovereign government issues. The actual size of this yield premium, the yield the securities pay in excess of similar government securities—will depend on the credit quality of the assets and the structure of the transaction. Pension funds—which comprise much of the market for MBS and ABS—pay close attention to this premium as they seek a wide variety of safe fixed income products with attractive yields. Insurance companies, money managers and other institutional investors with needs for fixed-income securities with specific features are also large ABS/MBS investors. The ability of issuers to vary the terms of securities backed by the same asset pool through different securitization techniques also makes MBS and ABS attractive to investors. In a sense, issuers can tailor the coupon, maturity and seniority of a security according to particular investor's needs. This flexibility not only boosts investor interest in ABS and MBS, but also contributes to more efficient capital markets by ensuring investors and money managers have access to the most appropriate securities. Flexibility for the Originator Securitization also benefits the financial institution or corporation that originates the securitized asset. Without securitization, a bank making a home loan usually would hold that loan on its books, recognizing revenue as payments are made over time. To realize the value of the loan immediately, the bank can sell the whole loan to another institution, though this is generally not economical unless the loan is very large. The more efficient option is to pool similar loans together, as discussed above, and enter into a securitization transaction. The process makes even more sense for originators with assets considered illiquid, such as equipment leases or the balance due on a credit card. The latter comprises an asset class called credit card receivables that account for approximately 20 percent of 7 zycnzj.com/

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