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Briefing

Special Purpose Vehicles (SPV)

Appears in: North America, Finance and Banking, United States, Securitization and Structured Finance

Background:

Financial institutions that originate mortgages, for example, turn their loans into marketable securities by securitization in order to obtain more funds to make loans. Mortgage-backed (MBS) securities thus represent a claim on the underlying mortgage pool’s principal and interest payments. In order to trade the securities independently of the loan originating institution, MBS are not issued directly by the sponsoring financial institution. Instead, pools of loans are sold ("true sale") to a special-purpose vehicle (SPV) - usually a corporation - who then may or may not sell the loan pools to a trust. The trust or SPV repackages the loans as interest-bearing MBS and actually issues them. The use of an SPV or MBS issuing trust is necessary to achieve "bankruptcy remoteness," insulating the trust from the sponsor. It also enables MBS to receive their own credit rating independently of that of the sponsor. The MBS then are sold to investors by the investment banks that underwrite them.

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