Mechanism Of Securitization In The System Of Mortgage Refinancing.

The last decades were a period of introducing into the banking practices various financial innovations and tools. Among the most demanded techniques in recent year include securitization of bank assets.

Mechanism of securitization was first introduced more than 30 years ago in the U.S. and literally made a revolution in the banking and financial sectors. Today, many people call it one of the major innovations of the twentieth century, which gave impetus to the development of financial markets.

In general, the process of securitization is the process of transfer of assets into more liquid form. In a narrower aspect securitization can be defined as a financial transaction which includes the transformation of low-liquid assets into securities provided by cash flow from the source of assets, which resulted in the redistribution of risk between the primary owner of the assets, the guarantor and investors. Established classification of securitization of bank assets has not yet been established, but most authors distinguish its two basic types: traditional and synthetic.

Technique of traditional securitization suggests that it is inefficiently to keep on the bank’s balance the assets of high and low quality together, because all quality assets are on the balance the bank, they bear all its risks. Thus, the only solution is the separation of mortgage-related assets (asset quality) and output them for the balance of the bank. In world practice, to separate the assets, a special company SPV (Special Purpose Vehicle) is created that subsequently sold the assets and that eliminates the risks associated with other activities undertaken by the seller of assets.

However, a large pool of these loans must be store somewhere. The first option – is to accumulate large portfolios of mortgage loans on the books of the bank, but this option is considered to be uneconomical because of low capitalization and claims on the obligatory reserve fund for commercial banks. Because of this it was created a mechanism for accumulating assets beyond the balance sheet, namely the balance of the SPV.

Legally SPV – is the constitutional structure, created for well-defined and strictly limited purposes, and legally independent of its founder. Commercial activities that are permitted to engage in mortgage SPV are strictly limited.

Once SPV got a required number of the assets, it comes up securities backed by those assets.

However, the original link in this chain of refinancing is a bank which is engaged in mortgage lending, and intends to sell the rights to these credits on an ongoing basis, while continuing their service. The Bank, originally issued these loans is called the originator. Its primary function – is loan servicing, that is, execution of the function the service agent.

Besides the Primary Servicer, in the international practice there is a Backup Primary Service), which should begin to pool maintenance functions in the event of failure of Primary Servicer.

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