Asset Securitization and Loan-Packaging Key Terms
Study key terms to improve your company's asset securitization and loan-package managementYou can securitize and package any asset provided there is an underlying payment stream. For example, one of the most popular types of asset-backed securities is one that uses mortgage payments for the cash payment stream. The structure of each securitized asset is a direct indicator of the risk of the investment. One that's properly structured will provide a consistent return with negligible risk. However, the structure of many of these assets can be questionable, making their risk premiums extremely high. Finally, there's the underlying payment because if the payments stop, the value of the securitized asset can fall precipitously.
That's why it's important to understand the key terms of these financial vehicles before making an investment. The following are a few terms that will help you know how these securitized assets operate:
Special-purpose vehicle company
Asset-backed and mortgage-backed securitiesAs the asset securitization and loan-packaging market grew over the years there became two prominent classes, which are asset-backed and mortgage-backed securities. You'll sometimes see the mortgage class classified in with the asset class. Nevertheless, both are a package of loans that have some form of debt at their core. As you can guess, mortgage-backed securities use mortgages, and assets-backed securities utilize a wider range of debt from credit card to business and personal loans to leases.
Uniform commercial code (UCC)When you evaluate the securitization of assets, it's important to understand the Uniform Commercial Code (UCC), more specifically Article 9 of this code. Article 9 governs the way a company can securitize assets and package loans.
Cornell University Law School.
Floating rate notesSecuritized assets that reset at a given rate at regular intervals are floating rate notes. When viewing or structuring securitized assets, you often see this term. The given rate for the reset is usually the LIBOR or the U.S. Treasury bill rate.
Securitization structureAssets securitization and loan-packaging risk correlate directly with the structure of these assets. Each type of underlying asset has its own structuring challenges. It's almost like building a house with a solid foundation, and the house will hold up during any storm. However, a weak foundation can be trouble in turbulent market conditions.
Risk managementRisk management is another chief reason a company may decide to securitize assets. Securitization allows a company to pool debt into a separate asset class, thereby reducing risk to its overall balance sheet. However, if the structure of these assets is poor, it can lead to more risk, not less.
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