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

Risk and return, I need report on Risk and Return. Do you provide help in t...

I need report on Risk and Return. Do you provide help in topic Risk and Return? I need expert's assistance to solve my college assignment. Please suggest if it works for me.

Understand by the term government policy agenda, Question 1: Give an ac...

Question 1: Give an account of the role of governmental bodies and officials in the making of public policies. Question 2: What do you understand by the term "Governmen

Floating rate notes (frns), Floating Rate Notes (FRNs): When interest r...

Floating Rate Notes (FRNs): When interest rates are high and the general outlook is either stable or indicating the possibility of a downward trend in return, then an investor

Investment opportunities in capital budgeting process, Briefly examine the ...

Briefly examine the significance of identification of investment opportunities in capital budgeting process

Function of the investment decision, Q. Function of the Investment decision...

Q. Function of the Investment decision? Investment decision related of the selection of the fixed assets. the assets can be acquired fall into two board groups i) long terms

Formation of board of amc and restrictions on directors, Formation of Board...

Formation of Board of AMC and Restrictions on Directors Having regard to the significant role of the Board of Directors of the AMC in rendering the company's operations efficie

Quantitative analysis, A researcher develops a regression model to understa...

A researcher develops a regression model to understand how student-to-teacher ratios affect test scores. The researcher theorizes that age, gender, and race do not impact test scor

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

A company has total debt , A company has total debt of $1,200 and a debt-eq...

A company has total debt of $1,200 and a debt-equity ratio of 0.5. What will be  the value of the total assets?

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