The idea of securitisation has slowly become public knowledge as organisations such as NewERA and the DCU talk to the media about the subject. There have been TV shows and Mainstream magazine and newspaper articles on the subject. So, we kind of know how it works. That said it can be a bit confusing so here is a reminder based on a court case where a creditor explained how securitisation is conducted and the process was questioned.
Securitisation – Step by Step
The lender, also called the originator (for example a bank), makes a loan to a borrower and the loan amount is transferred to the borrower. The borrower makes all repayments of the loan to the originator (eg. to the bank). This is normally all consumers know about. They borrowed money from the bank and so they pay the bank for the loan.
The loan is “warehoused” or kept by the originator, until they have a bunch of similar loans that they can group together.
The originator sells all these similar loans to a Special Purpose Vehicle (SPV) – a legal entity which is created by the originator.
The SPV pays (the bank) for the loans by selling certificates (which represent ownership of the loans) to investors.
The money paid by investors for these certificates is then passed on to the originator (the bank). At this stage a credit rating agency ‘rates’ the securities issued by the SPV.
So far you may be happy that this is how you understood the process to work but there is another role player or two in these matters. Now things get a little bit tricky.
A servicer is appointed.
What does a Servicer do?
The duties of the servicer include providing administration for the duration of the issue of the certificates as well as servicing the loans in the SPV (and servicing “problem” loans).
What must be kept in mind is that in many cases, the originator performs the role of servicer.
A trustee can also be appointed to ensure that investors are paid in accordance with the terms of the securities and to monitor the performance of the servicer. That way the investors get their money no matter what. They kind of make sure the money keeps flowing even if some consumers don’t make payments.
What happens then if the Bank or Originator does not fill the role of Servicer?
If the originator does not perform the role of servicer, the borrower (the consumer) is instructed to make payments to whoever the servicer is and to direct all inquiries to the servicer. At present this is not happening to often in SA. Most people simply continue to pay the bank who they took the money from never even knowing that their loan has been securitised.
Still a bit of a mystery
This is the process of securitisation. Organisations such as the DCU are questioning whether a bank – who sells off a loan to a SPV – can ever issue a summons for that debt rather than the SPV itself. It is now becoming more common for consumers to get summonses from SPVs who they have never heard of before. Organisations are calling for more clarity and that consumers be notified when the loan changes hands and is sold off to a SPV and is securitised. What has now become clear, after all the press coverage on the topic, is that in many, if not most, cases there are several steps in these procedures that create additional cost and expenses and that most of these steps are unknown or hidden from the borrower.