Whole Loans vs Securitisation: Weighing the Options
Whole loans offer higher returns, but investors should be aware of the increased risks compared to traditional securitisation.
Both whole loans and securitisation stem from the need for financial institutions to find alternative funding sources and free up capacity on their balance sheets.
- Whole loans provide higher returns, but with increased risks.
- Securitisation involves pooling loans and raising finance backed by those loans.
At a very high level, securitisation can be thought of as where an originator ‘pools’ loans then raises finance backed by those loans, where the security represents a claim on the income from the loans.
The process of securitisation 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’.
A solid understanding of the pros and cons of each is essential to determine which is more appropriate, depending on the investor’s risk tolerance.
Author's summary: Whole loans and securitisation offer different investment options.
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