A few years back, folks in the banking industry had an interesting idea: Take thousands of mortgage loans, assemble them into a pool, and issue mortgage-backed securities against the revenue stream they generate. The process, known as securitization, has proved itself to be one of mind-boggling complexity.
Briefly, it begins by subjecting each loan in the pool to a sequence of sales, the last of which is to a specially created single-purpose vehicle, usually a trust with a major bank as its trustee. This is done to completely separate the pool from the assets and liabilities of the originating lender, were it to file for bankruptcy or go into receivership.
Without complete separation, the transfer of ownership might be viewed as a secured loan rather than a true sale, which could allow the originating lender to reclaim the loan by right of redemption and leave the investors high and dry. But that is only the half of it.