Loan Sales and Securitization: Managing Financial Risks

This lecture covers the concepts of loan sales and securitization as methods for financial institutions to manage risks associated with lending. It begins with a review of loan restructuring, emphasizing the importance of avoiding borrower defaults through beneficial modifications. The instructor discusses various types of loan restructurings and the reasons why they are not more common, highlighting the balance between potential costs and benefits for lenders. The lecture then transitions to securitization, explaining how loans are pooled and transformed into securities, which can be sold to investors. Key aspects of the securitization process, including the roles of issuers and servicers, are detailed. The instructor also addresses the risks involved in securitization, such as adverse selection and moral hazard, and discusses credit enhancements that can mitigate these risks. The lecture concludes with a discussion on the implications of securitization in the context of the financial crisis, emphasizing the need for careful risk management in financial markets.