Structured Settlement Securitization Made Easy
Structured Settlement Basics
Increasing numbers of settlement recipients are accepting structured "lump sum" settlements in lieu of "periodic payments." This is no doubt, due in part to the sagging economy.
Although Structured Settlement Securitization may sound financially complex, I will break it down into layman's terms and make it easy to understand. First, let's get you familiar with some of the terminology related to topic.
- Settlement Payer: This is the company, organization, or institution from which you receive your monthly (or other payment frequency) settlement payments.
- Settlement Buyer: This is the company that buys the monthly (or other payment frequency) settlement payments you receive. After you sell and receive the agreed upon lump sum, the Payer begins receiving those payments.
- Settlement Seller: You are the seller. You sell your monthly payments for a lesser lump sum amount to the Buyer.
I will be referring to these terms and their variations throughout the remainder of this material. This will make it easy for you to follow along with the functions and interests of each party involved in a structured settlement transaction.
Selling Your Periodic Settlement Payments
When you sell your future settlement payments, you enter into a consensual agreement between Buyer and Seller to convey absolutely the Seller’s (your ) interest in the monthly settlement payments or specified portions of your payments.
There are many conditions that must be met before the deal is sealed. It's not unusual for larger, more complex deals to stretch out over four to six months. Much of this time is spent acquiring and presenting the proofs and assurances required of both Buyer and Seller.
So What Is Securitization?
Securitization is a financial practice that involves pooling various types of contractual debt such as settlement payments, residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized Mortgage Obligations (CMOs), to investors.
You receive a judgement and are awarded monthly payments of $5,000 for the next 20 years. In total, you would have received 1.2 million dollars at the end of 20 years.
You don't want to wait 20 years and would like to sell your monthly payments to a Seller. Let's say you get a really good deal and the Buyer offers $900,000 for your $1.2 million. At the end of the 20 year period they will realize a total profit of $300,000.
Now, suppose the Buyer doesn't want to foot the whole $900,000 purchase price all by themselves. If that's the case, they can offer bonds to investors, who share in the risks and the profits. This risk is focused on the Settlement Payer. If they default and can't pay the contractual amount due on the settlement -- the Buyer and investors suffer the loss. Also, a Buyer can't come back to you seeking financial remedy if the Payer defaults.
So basically, structured settlement securitization is all about ensuring the deals are genuine and providing some type risk mitigation on the part of the Buyer and to a lesser extent, the investors.