S1. What is Securitization?

Securitization has come up a lot recently, especially in the context of the sub-prime mortgage crisis. This is a first introductory video describing briefly what securitization is.

Category:

Education

Tags:

• savings
• investment
• securitization
• securitisation
• saving
• investing
• money
• economy
• wealth
• stock
• bond
• finance
• financial
• educational

[johnpaulsialafau]

Thank you. Man, who needs text books when you can watch Michael Fisher. This'll be helpful in my Finance exam. You're a legend Mr. Fisher.

[savingandinvesting]

@johnpaulsialafau Special purpose vehicle can have any name like 'Delta 2007 - 11' to refer to date of pool or mortgages. Investors buy tranches of the vehicle, i.e. for return of expected cash flows; selling bank receives the payment upfront thereby transferring the risk. Because the tranches (securitized) are more liquid than the pool, and were rated too highly in sub-prime crisis (meaning lower required yield) price in aggregate of the pool was higher once securitized. Hope that helps.

[iamtallerthanher]

Pardon my ignorance too, but I just can't see where money is made? If a financial institution provides loans of say total 100k @5%, these now appear as assets on their BS. If pooled together (even with their varying risks,but I assumed a standard rate of 5% for the example), and put in a "seperate vehicle" what name goes on this "vehicle"?; how are these then "sold off"? Also, are these loans sold off @ >5%? Effectively all I want to know is how do all parties make money? Also thanks for videos.

[savingandinvesting]

@iamtallerthanher Special purpose vehicle can have any name like 'Delta 2007 - 11' to refer to date of pool or mortgages. Investors buy tranches of the vehicle, i.e. for return of expected cash flows; selling bank receives the payment upfront thereby transferring the risk. Because the tranches (securitized) are more liquid than the pool, and were rated too highly in sub-prime crisis (meaning lower required yield) price in aggregate of the pool was higher once securitized. Hope that helps.

[PresidentMugabe1990]

it all makes sense, i guess, i see how it would benefit the lenders to spread the risk but how does securitisation benefit investors who are just buying the loans off the lenders? how do investors benefit from this?

[savingandinvesting]

The lender/buyer of the securitized loans is investor. Greatest benefit to borrowers is/was that repackaging allowed more money to be borrowed as loans could be offered to more types of investors. Many investors bought them was as return was high for rating - for example a AA rated securitized product might provide better yield than other AA rated bonds. (In 2008, often the securitized bond turned out to be perhaps more risky than the rating indicated and defaults occurred). Hope that helps, MF.

[okrh2]

Michael,

Please don't stop making these videos. They're actually life changing. I've been recommending them to a lot of people who have until now - like me - felt totally out of their depth on this stuff.

Cheers.

[liyans1]

thank you!i had an econ exam today and all your videos really helped me =)

[SalsabilSaeed]

simply excellent

[EmporiumCosmetics]

Hi, I understand why the investors would want to buy the debt (secularized loans) but why the loans issuer would want to sell them? They must have sell it cheaper than the potential earnings on this loans (meaning when the whole profit is paid off) in order to make it appealing for the buyer...but then they are loosing out on some of the profits...no? why would they want to do that? is my understanding totally wrong? thanks

[iamtallerthanher]

@yasmine880 this is exactly what I don't understand

[Lvankov]

@TheSheik154 : The separate vehicle is usually called a special purpose vehicle (SPV) or a special purpose entity or company (SPE, SPC), which is being specifically created so that it could issue new stock with the very loans being the underlying. This would reduce the risk of bakruptcy and thereby obtain lower interest rates from potential buyers.