“Securitization”….Since I have been asked this before – Yes, it is a word and no, it doesn’t have anything to do with ensuring your personal possessions are “secure”. Securitization is a specialized form of financing available to financial institutions like Concentra and credit unions. It’s a dynamic and multifaceted industry but one that is not well understood.
Over the next month on our blog, we will take a deeper dive into securitization to promote a better understanding of this strategy and some of the best options available to your credit union.
Securitization is a financial strategy that when used effectively works to diversify risk and help improve the bottom line for your credit union. It is the practice of combining various debt obligations, such as residential mortgages, commercial mortgages, auto loans or credit card obligations into a consolidated debt instrument, or new security, such as a bond. Once the debt obligations have been combined, or “pooled”, a coupon will be set and this will be paid to the purchaser of the bond. The underlying debt obligations are what secure the bond and the principal and interest payments made by the debt holders fund the bond’s coupon.
There are many different types of products that are created as a result of securitization, including both mortgage-backed and asset-backed securities.
Even though there are many types of products that can be created as a result of securitization, we are going to focus on one in particular – Mortgage-Backed Securities, or “MBS”. As mentioned, securitization is the process of combining debt obligations into a consolidated debt instrument, such as a bond. A mortgage-backed security is basically a bond that has been created through securitization and gives the holder of the bond access to the cash flows, principal and interest payments, of the underlying mortgages.
There are several types of MBS including RMBS (Residential Mortgage-Backed Securities), CMBS (Commercial Mortgage-Backed Securities); while in Canada, we also have a product called NHA MBS (National Housing Act Mortgage-Backed Securities).
If you would like more information on becoming an approved issuer of Mortgage-Backed Securities or are interested in your pooling options, Concentra is here to help your credit union through the process. Please feel free to contact us at Concentra – Securitization firstname.lastname@example.org.
Stay tuned for the next blog post where we’ll look at the advantages and disadvantages of the NHA MBS program.
Kurtis Nagle, Securitization Analyst, Residential Markets