FINANCIAL CRISIS AND SECURITISATION

FINANCIAL CRISIS AND SECURITISATION

FINANCIAL CRISIS AND SECURITISATION

Introduction

Securitization began in the 1970s, created as a vehicle to provide additional mortgage credit to the residential housing market. At that time, savings and loan associations, or “thrifts,” were the predominant originators of mortgage loans. A family buying a home would typically take out a government-insured or conventional (non-government insured) mortgage loan from a thrift that financed its loan portfolio primarily through savings deposits and held the loans until maturity (or prepayment).

The Great depression of the 1920's, Deep Financial Recession (known as Black Tuesday) of the late 1980's, and the prevailing fiscal critical purpose o 2008.

Congress sought to provide support to the residential mortgage market as far back as the Depression. In 1938, the National Housing Act of 1934 established the Federal National Mortgage Association (Fannie Mae) to create a more liquid secondary market for mortgage loans insured by the Federal Housing Administration. In 1968, Congress divided what had been Fannie Mae into two parts: the Government National Mortgage Association, a federal agency, and a government-sponsored but entirely private and shareholder-owned enterprise still known as Fannie Mae.29 Fannie Mae continued to purchase FHA/VA loans for its portfolio, while Ginnie Mae was authorized to“purchase, sell, or otherwise deal in any securities” guaranteed by FHA/VA. In 1970, the Ginnie Mae issued the first mortgage pass-through security, backed by FHA/VA-insured loans and guaranteed by Ginnie Mae. It was the simplest form of mortgage-backed security - a participation certificate entitling the holder to principal and interest payments from the underlying pool of mortgage loans, net of expenses. As the growing secondary market for FHA and VA loans led to demands for similar treatment of conventional mortgage loans, which comprised the majority of mortgages originated, Congress responded by creating the private, shareholder-owned Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970. In 1971, Freddie Mac began to issue mortgage pass-through securities backed by pools of conventional mortgage loans, and a year later, Fannie Mae was granted similar authority. The Resolution Trust Corporation (RTC), established by Congress in 1989 to oversee the disposition of large quantities of assets from insolvent savings and loan associations, played a role not only in the expansion of the MBS market but also in the development of markets for new asset classes.

What is Securitization? What is the value of it? (300-350 words) - What is the method of securitization? How it developed?

Securitization is a financial practices combine different types of contractual debts such as mortgage loans, commercial loans, auto loans and credit card debt obligations and said the sale of debt, bonds, pass-through securities, collateralized mortgage obligations, or (CMOS), for different investors. Principal and interest on the debt underlying the security is returned to various investors on a regular basis. Securities backed by mortgages are called mortgage-backed securities, and those supported by other types of receivables are asset-backed securities. The so-called low-risk securitized instruments attracts more investors seeking to take advantage of making many individual assets and restructure them as collateralized ...