From an insider at the ground level of structured finance, there are two major types of structured finance, asset backed and mortgage backed. Regardless of which, the goal of both is to secure an entire bundle of loans together into a massive pool (valued in the low billions/upper hundreds of millions of dollars). The pool is created in such a way and with a certain amount and type of loans so as to make the risk of CONSEQUENTIAL amounts of default of the ENTIRE POOL virtually nonexistent (thinks mixing low risk with high risk but more complex try searching "scratch and dent" and securitization). For instance, an example of risk sheltering is done by the originator of the loan. The originator (bank, financial institution etc) will bundle the loans and sell off 85-95% of the entire bundle, reserving 5-15% as a default cushion (much like putting 20% down on a home). The bank would therefore suffer the first 5-15% loss on the pool, if any.
Investors then purchase shares in the almost guaranteed income from interest and thereby return the money that was loaned out by the banks, back to the banks. In the end, this process enables banks/financial institutions to make more loans, repeat the process and pick up a few hundred million or so a month.
Since it is essentially making thousands of 50-250k loans or making several large loans and breaking them up, selling most of the rights to the interest payments thereto, and in the end recovering 90% of the money that you initially had to loan out. This process takes approximately 6 months from the day the loan is first contemplated. Jan 1 contemplation, Jan 30 arrives at lawyers, March 30 Closing, June loan is sold.
What's structured finance?
