What is a structured product? Structured Products securitized products structured credit or asset-backed Securities. These are all terms that apply to the broader term of structured Finance.
Regardless we are discussing debt, which has been issued and then sold to investors that is secured by pools of contractual obligations.
The contractual obligations like the ones we saw on the previous slide pay timely interest and principal payments.
Those payments are collected restructured into a new security with differing risk profiles and then pass through to investors seeking different types of risk.
We will examine how this is done. Later.
The important thing is to understand why.
The ability to take a single obligation and repackage it with hundreds of other obligations into a security gives investors an opportunity to invest in markets which were previously unavailable to them.
Most investors for example do not have access to the auto loan Market or The Leverage loan Market by creating demand for these products liquidity is created and the result is more demand for the underlying obligations.
This in turn has created a market where companies or other entities can turn to the securitization Market to raise Capital based on the underlying obligations or assets.
The federal government plays a huge role in the structured product Market. It does so by backing the loans made for certain real estate purchases using the federal agencies, which were created for just such a purpose.
Why does it do this? By creating agencies to purchase the outstanding residential and Commercial mortgages and then securitizing them to be sold to other investors several things are accomplished firstly with an active buyer of quality loans The Lending institutions have more incentive to make more loans the loans. Therefore do not remain on the bank's balance sheets this creates liquidity in those lending markets.
Secondly by repackaging the loans into securitized products investors now have an opportunity to invest in an asset class that would have otherwise been unavailable to them commercial and residential agency-backed real estate loans are by far the biggest class of structured product. However, not the only ones loans that are not backed by federal agencies such as credit card debt Auto debt corporate bonds and corporate loans.
And other kinds of real estate loans make up about 25% of structured Finance products. The non-mortgage asset back loans are about half of this Market. We will be focusing on these asset-backed Securities, although on a basic level many of these products work the same way.
