Introduction to Securitization

SELECTION OF THE ASSETS

Once the type of assets to be securitized is determined, the selection of the specific assets in the pool must be made. To do so, selection criteria are established. One essential criterion in selecting assets is the assembling of an asset pool so as to provide a balanced spread of constituents with maximum possible diversity. For example, in the selection of the loans for a residential mortgage-backed securities, geographical diversification of the properties is sought. This criterion is an important factor used by rating agencies in determining the amount of credit support for a securitization transaction.

Other selection criteria are the amount of seasoning of the assets (the amount of time since origination), the current performance of the assets (performing versus nonperforming assets), and historical performance. It is typically preferable to have a seasoned pool rather than a newly originated pool, currently performing assets, and assets with no overdue balances or more than a certain number of overdue days. The assets selected for the pool should have the same average characteristics of the pool. Significant deviations of assets selected from the average defining features of the pool quality are not ideal.

Depending on the collateral type, detailed selection criteria such as loan-to-value (LTV) ratio, debt-to-income ratio, property type, and the like are laid down.