Securitization helps provide banks and other lenders with the capital needed to make loans to consumers buying homes and cars, financing student loans, businesses looking to grow, or even just using credit cards. Via securitization, banks and other financial institutions package together a loan with other similar loans that are then purchased by investors as bonds, meaning these investors now essentially receive the payments from customers. These payments are prioritized by risk called tranches, which takes into account the timing of the payments, allowing for a diversified group of investors; short-term investors looking for immediate cash flow are attracted to loans to be repaid in the next couple of months to one year while longer-term investors can plan on repayment a few to many years out.
Here are a few things we think are important to know.
1. Whether they know it or not, families and businesses rely on — and benefit from — this process. Securitization provides $13.1 trillion of financing.
Last year, securitization funded more than 50% of US household debt.
- 12% of auto debt.
- 69% of residential mortgage debt.
- 12% of credit card debt.
- 10% of student loan debt.
In many of these cases, a loan was made at a cheaper rate to the borrower because of the optimization that occurs when investors’ risk parameters and borrowers’ needs are matched not just in the banking system, but via the global capital markets and the investment community. This also reduces our economy’s dependence on large bank balance sheets for all lending.
2. A broad range of financial services companies and related entities contribute to the securitization industry. Participants in the securitization process – and members of the Structured Finance Association, include:
- Asset managers of all sizes
- Insurance companies
- Credit unions
- Real estate investment companies
- Global, regional and community banks
- Non-bank lenders
- Credit card companies
- Auto credit companies
- Equipment manufacturers
- Mortgage originators
- Accounting firms
- Government-sponsored enterprises like Fannie Mae and Freddie Mac
- Law firms
- Rating agencies
- Broker dealers
- Mortgage insurers
- Trust companies
3. Regulatory reforms, coupled with industry safeguards and a strong appreciation for risk management, protect the system and the consumers today. Those protections promote a stable economy in which capital flows freely, investors find instruments that work for their portfolio, businesses can borrow in order to grow, and consumers find a ready source of funds to finance their purchases of homes, automobiles and other needs. At the Structured Finance Association, we are committed to a two-way dialogue with policy makers and the industry to collectively help ensure that our industry remains committed to the safety, soundness and growing needs of the entire economy.