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Securitisation Programmes: What are they and how do they work?

The big four banks in Australia. Westpac, Commonwealth, ANZ, NAB.

Previously we’ve discussed Managed Investment Schemes that Tier 2 lenders use to back investment financing. In this edition, we’re going to take a look at Securitisation of debt and tell you all that you need to know about it, so you can consider this as you traverse the rapids of your investment journey, expanding your portfolio and, hopefully, making a mint along the way. 

What is Securitisation?

Alright, so, securitisation is a procedure that sees the pooling of multiple financial assets into one group to create a single asset which can be used as a marketable financial instrument to be packaged and sold to investors. The key point of securitisation is that it gives investors, new and experienced, opportunities while simultaneously freeing up capital for originators ─ promoting liquidity in the marketplace on both counts, meaning that assets can be bought or sold with haste on the respective market, at a price that reflects its intrinsic value. 

When it comes down to it, any asset can be “securitised” in the financial markets as everything has value  ─ if it has a value, it can be traded for money. And, essentially, that is exactly what all securities are ─ items or assets that can be converted to cash. That said, you should note that while any item of value can become a “security,” it is most common to find securities backed by loans and assets that generate accounts receivable - such as debts. They are more profitable for the lender, after all. 

How does Securitisation Work? 

So, the organisation that is in control of or holding securitised assets is also known as the ‘originator’ ─ like a financial Terminator with, hopefully, less aggression. Anyway, the originator collates all of the data that is relevant to the assets that they intend to remove from their balance sheet. Like, for example, if it’s one of the Big Four, it may have a load of different commercial property mortgages or consumer loans that it no longer wants to service because of APRA regulations post-banking scandal. This collection of assets will no longer be considered a ‘reference’ portfolio and the originator (the bank, in this case) will sell the portfolio to a legal entity that creates, registers, and sells securities, known as an issuer. The issuer will do exactly that to the portfolio of assets it has bought off the banks. The securities that the issuer creates are representative of a stake in the assets within the portfolio and investors will purchase them with set rates of return. 

Usually, you’ll find that reference portfolios, when newly-minted as securitised assets, are split up into multiple segments, called tranches ─ a collection of securities that are paired-up through a number of factors like the type of loan that it is, their date of maturity, interest rate, or the amount of outstanding principal on the asset. Due to the wide variation of categorisation, different tranches carry different degrees of risk and, of course, have differing returns too ─ most likely, the higher the risk, the higher the return. Not only that, the cost of the underlying loans are charged based on the level of risk, so a higher risk directly correlates to higher interest rates for the lesser-qualified borrowers. 

The Best Example and the Benefits?

The best example of securitisation is, without a doubt, a commercial mortgage-backed security (MBS). An issuer amalgamates a collection of mortgages and dumps them in one individual portfolio. They are then able to split it up as necessary based on the inherent risk of default, relating to each property within the collection. Once sorted, the issuer sells the smaller portions of the portfolio to investors, as a type of bond

If you decide to buy into securitisation schemes to extend the reach of your investment portfolio, you will essentially be taking the position of a lender. To summarise, the whole idea of securitisation is that it allows the original creditor to clear the associated assets from its balance sheet, which frees up their cash flow and clears them to underwrite more loans. As an investor, you will profit because you earn a rate of return which is established by the associated interest payments that are being accumulated by the underlying loans by either the borrowers or the debtors. 

When it comes to the benefits, they’re fairly straight forward. Securitisation, as we’ve already mentioned, creates liquidity. The process makes usually unattainable assets and instruments accessible to the likes of, say, retail investors. A prime example of this would be the previously mentioned MBS, which, as an investor, you can buy individual segments of and receive reliable, regular returns as interest payments. Without this, small-time investors or beginners may find that they’re out-priced on the market and lack the capital needed to get involved with the larger pool of mortgages.

Are There Many Risks?

Well, like all investment schemes and routes, there is always a certain level of risk. For example, nobody can guarantee that assets, even securities that are backed by palpable assets, will keep their value if a debtor stops paying. And, the mechanisms that securitisation provides to reduce the risk for the creditor ─ via the division of ownership of debt obligations ─ is beneficial for obvious reasons, but if the loan holders accidentally default, it’ll be a downward spiral. 

Now, there is one rather large elephant in the room, which we should definitely mention, and that is mortgage-backed security. So, there can sometimes be a lack of transparency surrounding the underlying assets. And, said lack of transparency played a rather large part in the Global Financial Crisis (GFC) back in 2007-09, because the quality of the underlying loans was being misrepresented and mis-sold by the banks. That said, APRA regulations have since become more stringent, which acts as a relative safeguard, but, you never can tell!

While we, at Acumen, do not organise or manage Securitisation Programmes, we know the Tier 2 lenders who do, and those who can help you with your investment property financing needs. Why not get in touch with our team of experts here at Acumen Finance, so we can put you in touch with the Tier 2 lenders in Australia who can underwrite the loan that’ll provide you with capital to begin your property investment portfolio; we know the Tier 2 lending landscape and could even accelerate your loan applications and increase the likelihood of its approval. 

If you’re ready to be linked up to our sophisticated pool of lenders, we’re ready to fire up the engines and start-up the loan pre-approval process so that you’re ready to strike when the next best commercial property investment opportunity arises on the market. So, get in contact today