Securitization: Understanding?

Question by kehoejck: Securitization: Understanding?

Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors.

To free these blocked funds the assets are transferred by the originator (the person who holds the assets, ABC Bank in this case) to a special purpose vehicle (SPV).

The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile.

What this means is that only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities.

These securities issued by the SPV to the investors and are known as pass-through-certificates (PTCs).The cash flows (which will include principal repayment, interest and prepayments received ) received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted.”

I am trying to understand exaclty what the bank does to free up more cash. I would really appreciate help with this.

What I understand
Ok, banks give out loans to their customers and the properties are assets on balance sheet.How exactly by securitization does the company actually get in more funds> A very simple explanation would be appreciated.
What exactly are these investors getting?? Who do they make money from it?

Best answer:

Answer by frak1a12345
The investors gave money(puchased) for these PTCs. That money goes to the bank. The bank now has its money back and the investors have the PTCs.

What do you think? Answer below!