Evolution of securitization, Financial Management

Assignment Help:

Securitization is a financial innovation born out of the necessity the savings and loan associations of the United States of America face to save themselves from impending bankruptcy. When inflation began to rise and the market interest rates rose in step with it in the 1970s, these thrift (savings) institutions found that their spreads were turning negative, since they had to pay high market rates to attract short-term deposits (to compete with money market mutual funds and commercial banks offering money market accounts) and these rates were higher than the rates they were earning on the long-term mortgage loans which had been sanctioned years before. While mismatched assets and liabilities became a primary problem for the thrift institutions, another problem was excess demand for loans compared to the deposits collected by S&Ls, banks, etc. The solution to these problems was found in securitization of debt.

The securitization of residential real estate began in the United States on the basis of the deeply ingrained principle that the American family needs a home and will maintain that home over most other possessions; hence, the concept of using mortgage loans to support investment-grade securities. Here, the process of securitization took roots. Statistical research also showed that the default rates on residential real estate loan were both minimal and predictable. Investment bankers saw this as an opportunity to generate liquidity. By 'packaging' hundreds of individual real estate mortgages into one large security, great confidence could be achieved in terms of the financial characteristics of the group. While it would be impossible to guess the probability and timing of the default of any individual mortgage, one could frame reliable predictions regarding average default for a group of mortgages on the basis of historical studies of other similar large pools of mortgage loans.


Related Discussions:- Evolution of securitization

Noi approach, Two companies are identical in all aspects except in the debt...

Two companies are identical in all aspects except in the debt-equity profile. Company X has 14% debentures worth Rs. 25,00,000 whereas company Y does not have any debt. Both compan

Operating cycle, discuss the applicability of operating cycle in poultry in...

discuss the applicability of operating cycle in poultry industry[consider broilers]

Currency swap, How exchange of principal and interest in one currency? E...

How exchange of principal and interest in one currency? Expalin

Discuss the importance of dividend decisions, 1.   Discuss the various tech...

1.   Discuss the various techniques of inventory management for efficient working capital management. 2.   Discuss the importance of dividend decisions. What is MM theory of div

Calculate the present value and determine the npv, Assume today is 3 Decemb...

Assume today is 3 December 2009. Helen is 30 years old and has a Bachelor of Business. She is currently employed as a personal banker for ANZ banking group in Sydney and earns $380

Dividend payout ratio, Dividend Payout Ratio The percentage of earnings...

Dividend Payout Ratio The percentage of earnings or profit paid to shareholders in dividends. Computed as:   The payout ratio gives an idea about how well earning

Receivables management, Receivables Management The decision on whether...

Receivables Management The decision on whether to grant or not to grant credit to a particular customer can be taken if certain subjective probabilities of the payment pattern

Final stage of career, Q. Final stage of career? The final stage in one...

Q. Final stage of career? The final stage in one's career is difficult for everyone but is it hardest for those who have had continued successes in the earlier stages. After se

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd