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 have emerged as alternative funding sources for financial institutions to free up capacity on their balance sheets.
The development of these markets has created new opportunities for investors. However, the choice between whole loans and securitisation depends on an investor's risk tolerance, making it essential to understand the pros and cons of each.
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 process comprises three key steps, starting with a company identifying the assets it wants to remove from its balance sheet and pooling them into a 'reference portfolio'.
Author's summary: Whole loans and securitisation offer different investment options.
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