Whole Loans vs Securitisation: Weighing the Options
Whole loans offer higher returns, but investors must be aware of the increased risks compared to traditional securitisation.
Both whole loans and securitisation stem from the need for financial institutions to find alternative funding sources and free up capacity on their balance sheets.
The development of these markets has created new opportunities for investors, and the choice between them depends on the investor's risk tolerance.
Understanding Securitisation
Securitisation can be thought of as a process where an originator pools loans and raises finance backed by those loans, with the security representing a claim on the income from the loans.
The Securitisation Process
- The originator identifies assets to remove from its balance sheet and pools them into a reference portfolio.
A solid understanding of the pros and cons of each is essential.
Author's summary: Whole loans and securitisation offer different benefits and risks.
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