Overview
Securitization is a structured finance technique in which marketable debt securities are created from pools of cash-flow producing financial assets. The cash flows generated by the pool of underlying assets are used to make interest payments and to repay the principal of the securitized bond.

The first securitized bond was introduced in 1970 by Ginnie Mae. Prior to this, the secondary market for certain financial assets such as mortgages, leases, trade receivables and loans was relatively illiquid and fragmented. Securitization promised greater efficiencies for these markets as a way to free capital trapped in existing, illiquid mortgages or loans by selling pools of these assets to investors.

The proceeds from securitization could then be used to create new loans, thereafter establishing a clear separation of roles between “originators” and “investors” — a beneficial situation for both parties. Today, securitization is used by institutions such as banks, corporations and government agencies to improve the management of their balance sheets.

Investors find securitized bonds attractive for several reasons. As they often are composed of hundreds, if not thousands, of underlying loans, securitized bonds represent well-diversified pools of credit risk.

Additionally, Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS) typically offer higher yields than comparably rated highquality government and corporate debt.

Since its introduction in 1970, securitization bond issuance has expanded to become an asset class representing almost $11.5 trillion1 in outstanding debt.

Major securitized sectors
Securitized assets are classified by the type of loans supporting their cash flows. Agency MBS are backed by residential mortgages issued through Government Sponsored Entities and represent the majority of outstanding securitized debt at $5.6 trillion.

With AAA ratings, their credit risk is minimal as each individual mortgage in the pool carries an implied (Fannie Mae and Freddie Mac collateral) or full (Ginnie Mae collateral) U.S. Government guarantee. ...

Read Full: Introduction to Securitization: The Market for MBS, ABS, CMOs and CMBS

PDF format, 106KB.

MBSC Securities Corporation, Distributor.
A subsidiary of The Dreyfus Corporation.

For more information, please contact your BNY Mellon Cash Investment Services Learn More Representative, call 1-800-374-6969, or visit our website at www.bnymelloncis.com.

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