Introduction to securitization

Securitization bundles assets such as mortgages, credit card receivables, auto loans and future cash flows, then sells the bundle as a tradable security. For the company that owns the assets, the result is cash from selling them rather than from taking on debt. This guide explains how the technique works and where it is applied, including mortgages, collateralized debt obligations (CDOs), future flows, credit cards and auto loans.

The book covers how agency mortgage-backed securities (MBS) deals and nonagency deals are structured, and how credit enhancements are sized. It also looks at the use of interest rate derivatives in these transactions, the asset classes that get securitized, operational risk, the effect on financial markets, and the use of securitization in CDOs. Three appendices add an introduction to credit derivatives, a method for valuing MBS and asset-backed securities (ABS), and a way to estimate interest rate risk.

Fabozzi and Kothari are both recognized experts in the field. Their explanations draw on years of work with practitioners and graduate students around the world. Many securitization structures are complicated, and books on the subject tend to be either very long, highly technical or too shallow. This one aims for a fundamental yet thorough treatment that gives readers a working understanding of the subject.

The closing chapters examine securitization's role in markets and the wider economy, including the problems that emerged from securitizing subprime mortgages. Despite the damage to its reputation from that crisis, securitization remains a major source of funding for corporations, municipalities and governments, and a tool for managing risk.