Securitization of Mortgages
The securitization of mortgage is a concept which needs to be understood in the context of the grave crisis that sub prime mortgage in the US produced which engulfed the whole world whose shocks are still being felt.
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. Thus in a mortgage transaction a lender provides a loan to the borrower on the transfer of an interest in an immovable property, collects repayments of interest and the principal. And his dormant interest becomes an active once any default takes place. Although a mortgage may look apparently illiquid but it is not so. And here the concept of securitization assumes added significance.
Securitization is nothing but conversion of non-tradeable assets into tradeable assets and under it the loan itself is not sold to another lender but rather a security instrument is created backed by the principal and interest payments on the loan. Thus securitization is a process of replacement of one asset by the another in the balance sheet of the lender. And through this mechanism the beneficial ownership of the loan is transferred. The purchaser of the loan assumes the risk in the event of loan default and the lender removes the risk from the balance sheet. Once the secutitization takes place, the securities themselves can be traded in secondary maket.
Thus it can be observed that securitization is an important financial service in response to the premium for liquidity that distinguishes financing through capital market from bank financing.
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