Refers broadly to the practice of transforming financial assets, such as accounts, notes, and mortgages, into securities, either as a debt offering or as a “true sale.” The investment banks and credit rating agencies “tranch” the securities from AAA downward with each descending class being subordinate in certain respects to the class above it. Real estate-related securities are referred to as CMBS or Commercial Mortgage Backed Securities. Care is taken to make the securitization vehicle and the entities that transfer loans into it “bankruptcy remote.”
The basic securitization document is a Pooling & Servicing Agreement (often referred to as the “PSA”) establishing a trust for the benefit of the investors. The loans are administered by a Trustee, a Master Servicer, and a Special Servicer. The Special Servicer will be the one representing the securitization trust when the loan becomes troubled in some way. Some think this arrangement will create complications similar to those that cropped up in the old RTC days, but the real complexity will probably derive instead from the Byzantine loan structures being created with layers of senior debt, subordinate debt, preferred equity, etc.