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Securitization and Mortgage Backed Securities

Historically, banks were almost entirely reliant on deposits to raise funds. But in the past few decades banks have found alternative sources of funding. One of those sources is securitization. Securitization is the process of bundling illiquid financial assets and then creating securities that are backed by the cash flows from the pool of financial assets. The financial assets can be packaged in such a way that each bundle of assets has a different risk profile. Many banks securitize mortgages, for example, which creates a mortgage-backed security (MBS). A mortgage-backed security is a financial instrument that derives its cash flows from a pool of mortgages. You can have residential mortgage-backed securities (RMBS) or commercial mortgage-backed securities (CMBS). Mortgage-backed securities are a special type of asset-backed security (ABS) where the underlying asset is a mortgage. Asset-backed securities can also be backed by credit card receivables, car loans, student loans, equipment loans, etc. Valuing mortgage-backed securities and asset-backed securities is difficult because the cash flows are uncertain. This is due to: • interest rate risk • prepayment risk • default risk Some banks use Monte Carlo simulations to estimate the value of MBS or ABS. Securitization has several advantages: • It removes risky, illiquid assets from the bank’s balance sheet • It reduces the bank’s regulatory capital requirements • It raises cash and increases liquidity so the bank can underwrite more loans The investors buying the securities benefit from being able to invest in mortgages (or credit card debt, car loans, etc.) without having to originate or service the mortgages. — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES AND SPREADSHEETS http://eepurl.com/dIaa5z — SUPPORT EDSPIRA ON PATREON *  / prof_mclaughlin   — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST Apple Podcasts: https://podcasts.apple.com/us/podcast... Spotify: https://open.spotify.com/show/4WaNTqV... Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK   / prof_mclaughlin   — ACCESS INDEX OF VIDEOS https://www.edspira.com/index — CONNECT WITH EDSPIRA Facebook:   / edspira   Instagram:   / edspiradotcom   LinkedIn:   / edspira   — CONNECT WITH MICHAEL Twitter:   / prof_mclaughlin   LinkedIn:   / prof-michael-mclaughlin   — ABOUT EDSPIRA AND ITS CREATOR https://www.edspira.com/about/ https://michaelmclaughlin.com