Securitization transaction
Okay kiddo, let me try to explain securitization to you.
Imagine you have a piggy bank and you put your allowance money in it every week. But one day you find out that you need a lot of money to buy a new toy that you really want. You don't have all the money in your piggy bank, but you know that other kids also have piggy banks and they might have some extra money.
So, you decide to ask your friends if they want to lend you some money from their piggy banks. But instead of asking each friend individually, you ask your mom to help you gather all your friends' money together into one big jar. This way, you can borrow the money you need from the jar and pay your friends back later with interest.
This is what securitization is like, but for bigger things like mortgages or car loans. Banks and other lenders gather up a bunch of loans into one big "jar" or pool. Then, they sell "shares" of that pool to investors who want to earn money by receiving the future loan payments as interest. These shares are called "securities."
For example, let's say a bank wants to pool together 100 mortgages that they've given out. Instead of earning money slowly over time as the homeowners make their monthly payments, the bank can sell shares of the pool to investors. The investors will then earn money over time as the homeowners make their mortgage payments.
Sometimes, credit agencies or other companies will also rate the securities, similar to how your teacher grades your homework. The better the rating, the more likely investors will want to buy the shares.
Overall, securitization is a way for banks to free up money that they've already lent out and turn it into cash that they can use to lend out more money. And for investors, it's a way to earn money over time by investing in different types of loans.
Imagine you have a piggy bank and you put your allowance money in it every week. But one day you find out that you need a lot of money to buy a new toy that you really want. You don't have all the money in your piggy bank, but you know that other kids also have piggy banks and they might have some extra money.
So, you decide to ask your friends if they want to lend you some money from their piggy banks. But instead of asking each friend individually, you ask your mom to help you gather all your friends' money together into one big jar. This way, you can borrow the money you need from the jar and pay your friends back later with interest.
This is what securitization is like, but for bigger things like mortgages or car loans. Banks and other lenders gather up a bunch of loans into one big "jar" or pool. Then, they sell "shares" of that pool to investors who want to earn money by receiving the future loan payments as interest. These shares are called "securities."
For example, let's say a bank wants to pool together 100 mortgages that they've given out. Instead of earning money slowly over time as the homeowners make their monthly payments, the bank can sell shares of the pool to investors. The investors will then earn money over time as the homeowners make their mortgage payments.
Sometimes, credit agencies or other companies will also rate the securities, similar to how your teacher grades your homework. The better the rating, the more likely investors will want to buy the shares.
Overall, securitization is a way for banks to free up money that they've already lent out and turn it into cash that they can use to lend out more money. And for investors, it's a way to earn money over time by investing in different types of loans.
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