ROLE OF SECURITISATION

Role of securitisation during financial crisis

Role of securitisation during the financial crisis

Introduction

It seems that the Great Depression is likely to fade into the distance. In the last quarter of 2009, the economy raised at the rate of 5.9%. The stock market is yet increasing at the rate of about 70% over the course of past few years and there is a raise in I n its short term rate of lending to banks and financial experts believe that the financial system is about to be fixed. Consumers' confidence came down in February.

With one measure, the assessment of consumers regarding current conditions was at its least level since 1983. Surveys indicate that most of the people do not hope improvement in the financial conditions in the next six months and many believe that the situation is expected to worsen and a few feel that the crisis will persist for more than a year. Such opinions show that people are not much hopeful regarding improvement and are still very much frightened by the current situation as well as the future of economic scenario.

Securitisation

Mortgage securitisation has a significant role in the mortgage market. Mortgage securitisation brings about mortgage backed securities or MBS in which investors are enabled to expend money in the mortgage market. Each party to the securitisation of mortgages like bankers and originators of mortgage who furnish mortgages in favour of homeowners gain benefits from the process. It is to investors to apprehend that where the MBS is originating from and homeowners should be known that where the money goes that they pay for mortgage. Securitisation is a method through which mortgage loans are taken off from the books of banks and mortgage loaners and offer them to investors.

The concept of securitisation was presented in an attempt to expand the existence secondary market in home mortgages by delivering the introductory home mortgage backed securities (MBS) to institutional investors that hesitate to invest in the market.

Securitisation has brought about tremendous enhancement in the secondary market for loans, with offering the originators, particularly banks, greater flexibility of balance sheet and greater reach of all kinds to credit risk. Both the approaches have held it and it is reported that by the end of 2006, the amount of due securitized loans had hit the mark of $28 trillion.

Securitisation can also be viewed as a unified structure for the concepts that support economic development and growth that apparently seem to be significantly different in order to apply to distinct economic environments. Experts term that partial securitisation is a good way to finance economic development for third world countries through which they can pull investment capital from dead assets of capital. On the other hand, the system has pulled considerable cash from prosperous entrepreneurial business entities in market economies that are well developed.

It is believed that the system could bring about solution to one of the most alarming problems of the world that needs serious and urgent ...