FINE 442 Chapter Notes - Chapter 24: Prepayment Of Loan, Loan Sale, Collateralized Mortgage Obligation
14 Apr 2015
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Questions: loan securitization has increased in volume as a result of the creation of an active secondary market and the implicit and explicit government guarantees on passthrough securities. The loan sales market has suffered from credit risk exposure, high information and monitoring costs, and costly validation and transactions costs. In the event the loan is defaulted, the buyer of the loan has no recourse to the seller for any claims, transferring the credit risk entirely to the buyer. For the originator, it has completely eliminated this loan from its books. In the case of a sale with recourse, credit risk is still present for the originator because the buyer could transfer ownership of the loan back to the originator. Thus, from the perspective of the buyer, loans with recourse bear the least credit risk: short-term loan sales usually consist of maturities between one and three months and are secured by the assets of a firm.
