The process of structuring interests in loans and other receivables involving packaging, underwriting, and selling these interests as asset-backed securities (ABSs). This aims, among others, to segregate the assets, subject-matter of securitization, from the business of the securitization’s sponsor (the originator) by transferring these assets to a trust, usually in the form of a special purpose vehicle (SPV). The SPV is administered by a trustee, which can subcontract certain services and administration of the securitized assets to a subsidiary of the originator of the underlying pool of loans or a third-party provider. The trustee is always responsible for administering the SPV or the trust that takes the securitized assets on its balance sheet.
From the perspective of loan originators, asset securitization allows transfer of certain types of risks of ownership to other parties which would be willing to assume and manage them. Accordingly, originators can secure funding at better rates reflecting debt ratings higher than respective corporate ratings.
By segregating the assets and corresponding debt from their balance sheets, originators would be able to save part of the costs of on-balance-sheet financing. Asset securitization is also a tool for managing asset-liability mismatches and credit concentrations (see also, benefits of asset securitization).
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