Asset-backed securities to securitize payments

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We studied the use of asset-backed securities to “securitize” payments due on mortgage, car, or student loans; receivables on installment sales contracts; royalties owed to David Bowie; and the like. Please describe how these work as ways to get funds more cheaply for non-financial businesses and ways for financial institutions to get relief from capital requirements and the ability to make more loans while collecting servicing fees on the loans that have been securitized. Then describe how such securitization causes dangers to the economy by increasing riskiness in lending practices of financial institutions. Include a discussion of the issues raised by having more and more business and household debt ultimately funded by sources outside of the federal deposit insurance safety net (i.e., “shadow banking”).

Reference no: EM131995419

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