Securitization

Securitization is a financial transaction in which underlying assets are pooled and repackaging of cash flow producing those assets into securities then sold to investors with the assets as their backing. Investors can purchase these securities, either through a private offering or on the open market. Nowadays, many of financing companies that raise their cash by issuing securities that are backed by specified assets with either a fixed interest rate or a floating rate. All assets can be securitized so long as they are associated with cash flow. These securitized assets have been formed using various types of collateral, including mortgages, auto loans, leases, and installment contracts on personal property. The most general securitized product is the mortgage-backed security (MBS) which is a type of asset-backed security that is secured by a collection of mortgages.

Issuer
A bankruptcy-remote special purpose vehicle (SPV) who wholly-owned by the lender and serves as conduit of cash flow. Their normally jobs are to facilitate a securitization and to issue securities to investors. Their functions are to reduce the certain risk such as bankruptcy risk and obtain lower interest rates from potential investors
Lender
An entity that underwrites and funds loans that are sold to the SPV for inclusion in the securitization. Lenders are compensated by cash for the purchase of the loan and by fees. Lenders can be banks or non-banks. Sometime, the lender might contract with mortgage brokers.
Mortgage Broker
Acts as a facilitator between a borrower and the lender. The mortgage broker receives fee income upon the loan's closing.
Servicer
The entity who responsible for collecting loan payments from borrowers and for remitting these payments to the issuer for distribution to the investors. The servicer is normally compensated with fees based on the volume of loans serviced. The servicer is generally is responsible for handling delinquent loans and foreclosures
Investors
The purchasers of the securities issued by a SPV. Investors provide funding for the loans and assume varying degrees of credit risk, based on the terms of the securities they purchase.
Rating Agency
Assigns initial ratings to the various securities issued by the issuer and update these ratings based on subsequent performance and perceived risk.
Trustee
A third party appointed to represent the investors' interests in a securitization. The trustee ensures that the securitization operates as set forth in the securitization documents, which may include determinations about the servicer's compliance with established servicing criteria.
Credit Enhancement Provider
Securitization transactions may include credit enhancement which designed to decrease the credit risk of the structure. This enhancement may include the over-collateralization, third party guarantor, and cash funding and otherwise.
Underwriter
Administers the issuance of the securities to investors. Underwriter will consult on how to structure the ABS and MBS based on perception of investor demand and help determine whether to use their sales network to offer the securities to public or to place them privately.

Securitization involves the sale of the loan by the lender to an issuer who then sells securities to investors. The investors are buying "bonds" that entitle them to a share of the cash paid by the borrowers on their mortgages. Once the lender has sold the mortgage to the issuer, the lender no longer has the power to restructure the loan for its borrower. This is because of "bankruptcy remote," meaning that if the lender goes into bankruptcy, the assets of the issuer will not be distributed to the creditors of the lender. Furthermore, it protects the investor from any "corporate" risk of the entity selling the cash flow stream and allows the securitization structure to achieve a higher credit rating than that of the lender. The responsibility of a servicer is collects the mortgage payments, distributes them to the issuer for payment to investors. The servicer is follows the terms of documents of securitization and specify how it operates. One of the securitization documents is the Pooling and Servicing Agreement (PSA) which is a contract that defines how loans will be combined in a securitization, the administration and servicing of the loans, representations and warranties, and permissible loss lessening strategies that the servicer can perform in event of loan default such as takes action to recover cash for the investors if the borrower cannot pay.