LendingClub has seen issuance of their new CLUB Certificate reach $1bn in less than a year after first announcing the pass-through security product last December at their investor day. The CLUB Certificate was created to make it easier for institutions to invest in LendingClub originated loans.
Before the financial crisis the vast majority of the population had never heard of a securitization. But thanks to the incessant media coverage back then and movies like The Big Short the term is now part of the culture, although few people have a good understanding of the inner workings of a securitization.
What I want to do in this article is provide the casual observer with a more complete understanding of securitization, paying particular attention to how it applies to marketplace lending.
In its most basic form a securitization is just a pool of assets that have been packaged together and sold as if they were one asset. The underlying assets are typically loans or receivables of some kind that generate a regular cash flow. The new asset is a bond that can be bought and sold by large institutional investors.
The reason securitization is popular is that it provides the seller with a way to liquidate assets that would otherwise sit on their balance sheet for a long period. It also allows for a more efficient allocation of capital because it opens up the asset class to a broader pool of institutional investors. The proceeds are often used to originate more loans and the process is repeated. In this way a relatively small amount of capital can be put to work multiple times.