Question

-Explain the difference between loan sale and securitization. In your opinion, what differentiates a loan suitable for securitization from one that is not? A loan suitable for sale from one that is not?

Answer 1

Securitization is the process through which a loan is transfered to 3rd parties through issuance of debt instruments and the cash flows are collateralized. eg Mortgage Backed Securities(MBS), A Loan sale is the process of transferring a loan completely to a party without any future obligations by the seller. Both are seen as part of risk mitigation by the Banks which can reduce their risk expoure and profitability.

A loan suitable for securitization are which can produce a consistent cashflows from it and contains majority of highly credit payers. A Loan sale can happen when the Bank want to get rid off the loan from their balance sheet either as a part of risk mitigation or loss reduction in case of bad loans. Generally we can say that if the loan status is healthy the bank can always go for securitization since it can bring more spread profit compared to selling loan as a whole to 3rd party.