Question

What is securitization and what role did it play in the subprime loan mortgage market?

Answer 1

Securitisation: Government regulators view securitization as a way to make the banking system safer so that they can reduce the risk of possible defaults. Banks securitize debts for many reasons such as risk management, balance sheet issues, greater leverage of capital and to profit from origination fees. Debt is securitized by merging certain types of debt instruments and creating a new financial instrument from the merged debt. The types of debt instruments used may include residential mortgages, commercial mortgages, car loans or credit card obligations. If it's used wisely then it's an effective form of financing for underwriters of loans and leases such as auto, mortgage, credit cards, etc. The securitizations of the subprime mortgage loans, that eventually defaulted, caused a huge banking crisis which is called the subprime mortgage crisis.