Backed Securitization

By: EconomyWatch Content   Date: 29 January 2010

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Banks and financing companies use backed securitization to reduce their receivables and free up essential funds for investment in newer areas. The process involves pooling together various types of assets or receivables and issuing securities representing interests in such assets.

Categories of Backed Securitization

While any asset or receivable can be securitized, the most popular ones are: auto loans, student loans, mortgages, credit card receivables, lease payments, accounts receivables, corporate or sovereign debt. The three main categories of backed securitization are:

·        Mortgage Backed Securitization: In this category, securities are backed by mortgages.

·        Asset Backed Securitization: Securities are mostly backed by consumer debt

·        Collateralized Debt Obligations backed Securitization: This is backed by corporate bonds or any other form of corporate debt.

Process of Backed Securitization

In the process of backed securitization, the originator or the owner of assets sells those assets to a Special Purpose Vehicle (SPV), which may be a corporation, a trust or a partnership. This SPV carries out the process of securitization and may hold the assigned assets on its balance sheet or place them under a separate trust. The SPV sells bonds or securities to investors and uses the proceeds to pay off the originator.

Certain receivables or assets require continuation of servicing activities that include sending reminders, receiving payments and updating account balances. In most cases, the originator of the assets agrees to continue with the servicing activities for a small fee. Cash flows from the backing assets are used to pay off the servicing fees and the remainder is passed on to bond or security holders.

To avoid any kind of credit risk, the transfer of assets from the originator to the SPV should be done through a formal legal process. However, if the originator retains some stake in the assets, the risk of creditors seizing the assets in case of a bankruptcy remains. The nature of asset or the collateral backing a securitization also determines the level of credit risk involved. Those securities that are backed by assets with some credit risk are issued only after obtaining credit rating from a reputed agency.


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