115 CFA
File: Fixed Income - Reading 45 - 2. The Securitization Process

2. The Securitization Process

b. describe securitization, including the parties involved in the process and the roles they play;

c. describe typical structures of securitizations, including credit tranching and time tranching;

What are the four steps of the securitization process?
1. A lender originates loans, such as to a homeowner or corporation.
2. The lender sells certain assets (e.g., loans) to a special purpose vehicle (SPV). The structure is legally insulated from management.
3. The SPV issues debt, dividing up the benefits and risks among investors.
4. Payments from borrowers are deposited into the SPV, then transferred to investors.

What is prepayment tranching?
Prepayment tranching refers to dividing cash flows from securitized assets among different classes of securities so that some receive repayment of principal before others.

What is credit tranching?
Credit tranching refers to the creation of a multi-layered capital structure that includes senior and subordinated tranches (classes).

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