\"Loans are just like used cars. If you see an ad in the paper for a used care,
ID: 1180805 • Letter: #
Question
"Loans are just like used cars. If you see an ad in the paper for a used care, you have to wonder , why is the owner selling it? Maybe there is something wrong with the care that is hared to see. As a result, when you approach the seller, you will want to offer a very low price to make up for any defects. Instead, you could buy the used care from a dealer. The dealer offers a warranty on the car to protect its reputation. It is safer to buy from the dealer. In this regard, selling a used care through a dealer rather than directly is just like selling loans through securitization rather than one by one." Do you agree, disagree, or agree in part with this statement? What similarities and differences do you see between securitization and selling used cars
Thanks!
Explanation / Answer
yes i agree with your statement because Securitization involves (1) the sale of a large pool of Receivables by an entity (Originator) that creates such Receivables (or purchases the Receivables from entities that create them) in the course of its business to a "bankruptcy-remote," special purpose entity (SPE) in a manner that qualifies as a "true sale" (vs. a secured loan) and is intended to achieve certain results for accounting purposes, as well as protecting the Receivables from the claims of creditors of the Originator, and (2) the issuance and sale by the SPE (Issuer), in either a private placement or public offering, of debt securities (Securities) that are subsequently satisfied from the proceeds of and secured by the Receivables. When the Securitization is "closed," funds flow from the purchasers of the Securities (Investors - usually banks, insurance companies and pension funds) to the Issuer and from the Issuer to the Originator. All of these transactions occur virtually simultaneously.
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