Securitization refers to a process by which a group of assets undergoes and become financially engineered and transformed into security. Securitization entails the separation of assets and marking them as collateral when there is the issuance of securities. The value, however, of the transformed security is quoted depending on the market value. The process of securitization entails the following steps;
The originator, or rather, the owner of the assets, strikes a deal. For example, a company may need raising its finances or to service another debt; hence they will have to liquidate other assets and use them as securities
The collection made are put together in a pool of mortgages and, in turn, will be used as collateral.
After the creation of a pool of mortgages, its value is determined, and new security is established after that. This security thereby can be disposed of in the market to other firms, thus generating finances.
This process revolves around originators of mortgages and the homeowners, where through the securitization process, lenders acquire money and issue them back to homeowners, and the cycle continues. These securities, however, have been performing to the advantage of the third party who acquires them at a lower price. The chain of securitization process is also compromised since, as it goes up the chain, they lack federal housing laws.
Implementation of a securitization process requires expertise, and third parties who will be able to acquire the newly created security, otherwise it will not generate the money. Moreover, the high network of intermediaries, one may end up being trapped in fraudulent activities. The process becomes simple and more manageable when transacted in the right manner with the right people.
To the entire market, securitization implies a more relaxed way of acquiring extra income and issuing out other loans to homeowners.
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