bonds or debt securities collateralized by the cash flow from a pool of auto loans, credit card receivables, vehicle and equipment leases, consumer loans, insurance policies, and other obligations. The bonds give the holder an undivided interest in the securitized assets, and are funded by the cash flows received by the issuer from regular payments of principal and interest from borrowers.
The process of converting loans into marketable securities is known as securitization. When mortgage loans, consumer loans, commercial loans, and leases are securitized, the pools of assets backing a particular issue are transferred to a grantor trust, a passive entity that issues the securities that are purchased by investors. Virtually any debt obligation with regularly scheduled principal and interest payments can be securitized: auto loans, credit card receivables, home improvement loans, leases, residential mortgages, and second mortgages. Examples are Collateralised Auto Receivable Securities (CARS), Certificates For Amortizing Revolving Debt (CARDS), and mortgage-backed securities, such as Collateralized Mortgage Obligation (CMO), and Real Estate Mortgage Investment Conduit (REMIC). Debt securitizing also gives lenders another source of funds for making new loans, and is a technique actively used in Asset-Liability Management.
bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit and often enhanced by a bank Letter Of Credit or by insurance coverage provided by an institution other than the issuer.
bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit and often "enhanced" by a bank Letter of Credit or by insurance coverage provided by an institution other than the issuer. Typically, the originator of the loan or accounts receivable paper sells it to a specially created trust, which repackages it as securities with a minimum denomination of $1,000 and a term of five years or less. The securities are then underwritten by brokerage firms who reoffer them to the public. Examples are Certificate for Automobile Receivables (CARs) and so-called plastic bonds, backed by credit card receivables. Because the institution that originated the underlying loans or receivables is neither the obligor nor the guarantor, investors should evaluate the quality of the original paper, the worth of the guarantor or insurer, and the extent of the protection.
