You may need to engage an auditor to review your files on occasion if your organization issues house mortgages. Mortgage file audits are used for internal quality control or external validation by publicly traded corporations that are required to report to a regulatory agency. An audit of your mortgage application, review, and funding procedures ensure that all applicable regulations are followed, all data is correct, and the credit risk is acceptable. Annual audits are common, but some lending businesses or regulatory authorities may prefer quarterly audits.
Conduct a risk assessment for the entire firm.
Examine rules and procedures, prior examination and quality control reports, and interactions with functional area managers to identify hazards. Create a list of mitigating controls and assign a risk rating to the residual risk. It’s usually done once a year or whenever the risk situation changes (i.e., structural changes within the organization, new product or origination channels, regulatory changes, turnover of key personnel, etc.).
Determine the priority and frequency of auditable areas, be evaluated using risk assessment and residual risks assigned, and design a three-year audit program. Obtain the relevant approvals as the organization requires (i.e., Board of Directors, Audit Committee, President/CEO) once the audit schedule has been prepared.
Develop audit programs to evaluate if critical internal controls are followed and operating as intended, based on a study of regulatory and agency requirements and company-specific requirements addressed in associated policies and procedures. Personnel interviews and walk-throughs, design and effectiveness tests, and transactional testing are possible testing methodologies.
Conduct audits, identify findings, instances of non-compliance, or control flaws, and report to management using the audit procedures designed. Determine the root cause of the problems you’ve discovered and, if necessary, create and implement corrective action plans. Conduct remedial testing to ensure that the modifications are implemented and working correctly.
Pros and Cons of Securitization
Securitization is a financial process that converts a non-tradable asset into a tradable financial asset called security. The assets that serve as the foundation for securitization primarily generate receivables or debt owed to a business by its debtors and customers. Capital and periodic interest are included in receivables. Loans (student loans, vehicle loans, credit card loans, and so on) and mortgages are the most common assets utilized in securitization.
When a firm decides to securitize such assets, it transfers the debt to another entity, usually a trust or a particular purpose vehicle (SPV), which it then sells to another investor or group of investors known as the master owner. The original company is now out of the process after receiving payment for transferring the debt to the master owner.
An investor, of course, is not obligated to keep the securities in which he has invested. He can also trade these securities on their respective exchanges.
Securitization Has Its Benefits
Securitization produces liquidity in the market for the assets being securitized is perhaps its most significant benefit. This enables a corporation with debt on its books to eliminate that debt from its balance sheet and replace it with new funding. This is accomplished by converting the debt into securities, as mentioned above. As a result, the firm would have received cash in exchange for the debt it had converted to securities. Even more appealing, eliminating the debt on the company’s balance sheets may improve its credit rating, allowing it to acquire financing more cheaply than if the loan remained on the books. However, converting that debt into securities does not necessitate closing the account linked to that debt. As a result, these businesses eliminate the risk of debt, turn it liquid, and profit from the account’s maintenance.
Another benefit is that these debts can be piled into various tranches with varying risks. These provide investors with a wide range of options, as these tranches allow them to access returns and risks that are more closely aligned with their risk tolerances. An ultra-cautious investor, for example, might opt to invest in securities rated AAA, which means they’ll be the first to earn a return on investment, but at the lowest rate. An investor with a more significant risk appetite may opt to invest in BBB securities, which will require them to wait until the investors in higher-rated securities have been paid off but will reward them with a higher rate of return on their investments.
Borrowers benefit from securitization as well. Securitization means that these debt assets are lucrative and appealing. It allows corporations to efficiently use and liquidate the debt on their books while also providing investors with various appealing investment possibilities. As a result, organizations compete to give loans to borrowers, and this competition benefits these borrowers in a variety of ways, including lower rates, more options, and faster processing times. Essentially, with securitization, corporations compete for borrowers’ business, whose loans they can convert into securities to reap the benefits mentioned earlier.
Risks and Disadvantages
The most significant disadvantage of securitization, and the source of the greatest hazards, is its complexity. Securitization is a highly complicated process. The process can become even more convoluted when there is extensive government participation, such as in loans with social and political ramifications. All of the intricacies and complexity that went into such a procedure would have resulted in securities that are so intricate that assessing their level of risk appropriately is nearly impossible. As a result, the tranches of a securitization may have risk ratings that do not accurately reflect their genuine risk level. Investors are put in grave danger when risk ratings are erroneous. As long as the economy performs well, such securities will generate the projected revenue. However, when an economy freezes or contracts, repayments will inevitably be missed. If the tranches are improperly assessed, this will affect those investors who put their money into higher-risk tranches and those who put their money into the lowest-risk tranches. This can cause a cascade of fear that stretches well beyond these assets, potentially damaging the market. In effect, this is what occurred during the financial crisis of 2007.
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