Whole loans versus securitisation: Which is better?
Whole loans offer higher returns, but investors should 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 to free up capacity on their balance sheets.
The development of both markets has opened up additional opportunities for investors, and the choice between them depends on the investor's risk tolerance.
Understanding Securitisation
Securitisation can be thought of as the 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 process of securitisation comprises three key steps.
- The first step involves a company with loans or other income-producing assets, the originator, identifying the assets it wants to remove from its balance sheet and pooling them into a 'reference portfolio'.
A solid understanding of the pros and cons of each is essential to make an informed decision.
Investors should weigh the benefits and risks of whole loans and securitisation carefully.
Author's summary: Whole loans and securitisation offer different benefits and risks.
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