Securitization

11 Key excerpts on "Securitization"

• 

  eBook - PDF

  Securitization and the Global Economy

  History and Prospects for the Future

  • Bonnie G. Buchanan(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Securitization is a technique which has come to be epitomized as a key trigger of the 2007–2008 financial crisis (FCIC Report 2011). Once referred to as the “alchemy” by Lewis Ranieri 4 at the Salomon Bros mortgage-backed securities (MBS) trading desk, Securitization became the funding model and risk transfer method of choice for many global investors over the last four decades. Prior to the financial crisis two thirds of the outstanding US home mortgages were securitized (Aalbers 2009a, b) and between 30 and 75 percent of consumer loans were securitized (Gorton and Metrick 2012). By 2007, more than half of student and credit card loans were securitized in the USA (Arnold et al. 2012). Collier and Mahon (1993) argue that financialization may reverberate with globalization and Securitization, viewing financialization as a higher- order concept, while Securitization may be thought of as a tertiary con- cept. Thus Securitization refers to a set of techniques or a process which is a precondition for financialization but does not in itself contain all the properties financialization purports to possess. This is best illustrated in Fig. 1.1. 2 B.G. BUCHANAN So, where does Securitization fit in? I will start by broadly defining Securitization as the sale of underlying assets or debt so that they are removed off the issuer’s balance sheet [usually to a special purpose vehi- cle (SPV)], by pooling of illiquid assets, credit enhancement, and tranch- ing of the underlying pool. To make the securitized products more palatable to international investors, the tranches are assigned a rating by the major credit ratings agencies (such as Moody’s and Standard and Poor’s). The Securitization process should be able to sell and redistribute risk (especially credit risk and liquidity risk) to those investors who are more capable of bearing it. Results should include improved functional- ity and stability of the markets.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Securitization: Past, Present and Future

  • Solomon Y Deku, Alper Kara(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  What Is Securitization? Securitization is widely defined as the transformation of illiquid assets into marketable securities. However, this definition is incomplete at best. Prior to the emergence of Securitization, there was a grow- ing secondary market for loans. The loan sale process was expensive and complicated due to the lack of standardisation of loan contracts and information asymmetry. In the absence of explicit contract fea- tures safeguarding loan buyers, loan sellers may have incentives of selling low quality loans while retaining their best loans. Therefore, although loans were illiquid, other relatively liquid assets have also been securitised. Modern Securitization involves aggregating cash flow generating assets as opposed to the sale of individual assets. Securitization enables the transformation of a portfolio of financial assets (contractual debt) into marketable securities that have differing risk profiles from the original underlying assets (Saleuddin 2015). Mortgages were the traditional col- lateral used in Securitizations, however, as the market evolved, a wider array of assets have been securitised. The most common of which include auto loans, credit card receivables, student loans, corporate loans and negotiable financial instruments – bonds and other debt contracts. Therefore, even existing ABS could also be recursively securitised to cre- ate additional ABSs. Securitizations have three distinct characteristics (Fender and Mitchell 2009) 1. Creating a pool of eligible assets either cash based or synthetically 2. Isolating the credit risk of this pool from the originators estate by transfer to a bankruptcy remote special purpose vehicle 2 Mechanics of Securitization 9 3. Issuing tranched claims – with varying levels of seniority – backed by the underlying assets From Originate-to-Hold to Originate-to-Distribute In perfect markets, the choice between deposit funding and Securitization should be irrelevant.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  An Empire of Indifference

  American War and the Financial Logic of Risk Management

  • Randy Martin, Andrew Ross(Authors)
  • 2007(Publication Date)
  • Duke University Press Books

    (Publisher)

  Securitization was the ‘‘revolution’’ in fi-nancial services meant to mitigate the risks that came from these violating insecurities. ∂ Mortgages, car loans, and credit card debt are securitized when some financial interest purchases them from the issuer and then re-organizes this debt according to its risk characteristics. High-risk mort-gages or credit card debt—those whose debtors are beyond a certain debt-to-income ratio—can be separated and packaged as a distinct commodity or derivative. Risk is the measure for the rate of exchange among debt commodities. In the simplest terms, Securitization assembles credit, deriv-atives disperse risk. Securitization, far from being a reduction of polity to economy, an-nounces an intricate a≈liation between the two. It interweaves particular circuits through which wealth is amassed, the deployments of force to forge the shape of social life, and the whole repertory of engagements at people’s disposal to transform abstract beliefs into credible practice. There is no question that financial sectors flourish during moments of imperial trepidation and turnover. ∑ In this the present bears the signs of other eras. Much e√ort to wrestle the present into some serviceable political co-herence oscillates between the poles of the all-is-new and nothing-has-changed dichotomy, complicating the task of knowing what di√erence a critical intervention might make. Novelty is but an aspect of the present. Not all is new, and it would seem that little of the past ever fully departs. One temptation is to postulate the advent of new times in which every-thing moves in syncopation to the old ways, freed of their burdens and bad habits, but the challenge to critically oriented political thinking is to notice what is di√erent in the present so as to revalue what now seems possible.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Mechanics of Securitization

  A Practical Guide to Structuring and Closing Asset-Backed Security Transactions

  • Moorad Choudhry(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Instruments are available backed by a variety of assets covering the entire yield curve, with either fixed or floating coupons. In the United Kingdom, for example, it is common for mortgage-backed bonds to have floating coupons, mirroring the interest basis of the country's mortgages. To suit investor requirements, however, some of these structures have been modified, through swap arrangements, to pay fixed coupons.

  The market in structured finance securities was hit hard in the wake of the 2007–2008 financial crisis. Investors shunned asset-backed securities in a mass flight to quality. As the global economy recovered from recession, interest in Securitization resumed. We examine the fallout in the market later in this chapter. First we discuss the principal concepts that drive the desire to undertake Securitization.

  The Concept of Securitization

  Securitization is a well-established practice in the global debt capital markets. It refers to the sale of assets, which generate cash flows, from the institution that owns them, to another company that has been specifically set up for the purpose, and the issuing of notes by this second company. These notes are backed by the cash flows from the original assets. The technique was introduced first as a means of funding for mortgage banks in the United States, with the first such transaction generally recognized as having been undertaken by Salomon Brothers in 1979. Subsequently, the technique was applied to other assets such as credit card payments and leasing receivables, and has been employed worldwide. It has also been employed as part of asset-liability management, as a means of managing balance sheet risk.

  Reasons for Undertaking Securitization

  The driving force behind Securitization has been the need for banks to realize value from the assets on their balance sheet. Typically these assets are residential mortgages, corporate loans, and retail loans such as credit card debt. The following are factors that might lead a financial institution to securitize a part of its balance sheet:

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Euro Bonds: Markets, Infrastructure And Trends

  Markets, Infrastructure and Trends

  • Marida Bertocchi, Giorgio Consigli, Rita D'Ecclesia, Rosella Giacometti, Vittorio Moriggia, Sergio Ortobelli(Authors)
  • 2013(Publication Date)
  • WSPC

    (Publisher)

  Chapter 6

  Securitization Market

  (Rosella Giacometti)

  6.1   Introduction

  Securitization — the process by which an asset is transformed into a security i.e. a capital market instrument — has been one of the most innovative developments in financial markets in the last two decades. Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling the consolidated debt to various investors.

  Securities backed by mortgage receivables are called Mortgage Backed Securities (MBS), by bonds are called Collateralized Debt Obligations (CDO) while those backed by other types of receivables are broadly grouped as other Asset Backed Securities (ABS).

  Securitization has evolved from the late 1970s, when ‘Ginnie Mae’ — a government sponsored entity — sold its first MBS, to an estimated outstanding volumes of €6,685 billion in the United States and €1,959 billion in Europe as of the 4-th quarter of 2011. In 2011, ABS issuance amounted to €1,014 billion in the US and €372 billion in Europe.

  One of the principal characteristics required for assets to be securitized is that they can be decomposed into a series of cash flows or ‘receivables’, which can then be packaged and re-packaged with other cash flows. In other words, Securitization is a process by which the Originator identifies the claims that it would like to transfer to the market. Banks and private organisations have incomes that are due to them in the future in payment for loans or services that they have offered to third parties. By making these debt instruments available to the capital markets in a format they can easily handle, the Originators transform assets into liquid tradable securities. By pooling and repackaging these illiquid assets the Originators transform them into marketable securities. The motivation is to raise funds and transfer the risk of the underlying portfolio of assets to other investors. The funds raised can then be used for some other productive purpose.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Economics of Banking

  • Hans Keiding(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Chapter 8 Securitization and Shadow Banking 8.1 Introduction: What is Securitization? 8.1.1 The rise of Securitization One of the characteristic features of modern banking is the increased use of Securitization , the process of converting bank assets in the form of loans to marketable securities which can then be sold to the general public. Although the basic idea of Securitization is by no means new, having been used for centuries in connection with mortgage credit, its development into a mass phenomenon is quite recent, beginning in the 1990s and growing rapidly in the years before the financial crisis of 2007–8. As often happens, the Securitization model was considered as mainly beneficial to the financial sector and to society in its initial stage. Indeed, the transfer of bank assets to marketable papers was considered as a way of attracting new investors who would not have been forthcoming otherwise, thereby extending the overall potential for investment. The negative aspects were largely overlooked or considered as less important. In the aftermath of the financial crisis, these shortcomings have been the object of more active studies, and several serious problems were identified, which in many cases were related to the way in which the securities were issued. Because the failure of very large amounts of these securities was a spectacular part of the financial downturn, more attention was to be expected, and the research of the years following the crisis have given a better, if still not a full, understanding of the pros and cons of Securitization. The chapter is organized as follows: We begin with an overview of the Securitization process and the typical securities emerging from this process.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Regulating Securitized Products

  A Post Crisis Guide

  • R. Saleuddin(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 Introduction: Securitization as Villain and Savior

  Before 2007, I wager that very few academics, policy makers or indeed few outside a small coterie of specialists had any idea how important Securitization was to the growth in the financial economy during this millennium.1 By now, however, it has been well established that the practice of transferring some or all of the risks of some financial products from the originator (a mortgage lender, for example) to end investors played a significant destabilizing role during the Global Financial Crisis (GFC), and may have even been a primary cause of the worst economic turmoil since the Great Depression.2

  As has been well, though not always accurately, documented in the press and – more recently – the academic literature, legislative and industry reaction to the GFC has generated many new regulations, regulatory agencies and governmental powers. There can be no doubt that some progress has been made in making the financial system more robust in the face of any GFC-like recurrence. For example, liquidity lines to the most highly levered vehicles during the GFC are now much more capital intensive and, therefore, discourage such leverage. Chapter 3 covers the broader changes, the elements of the new regime that indirectly affect the markets for Securitization, as well as those specifically dealing with Securitization. More changes to this larger regulatory regime for financial markets are still to come. On the other hand, there are still significant controversies to be addressed, with a notable example being the debate between the effectiveness of ‘simple’ versus ‘complex’ regulatory regimes and rules.3

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Great American Housing Bubble

  What Went Wrong and How We Can Protect Ourselves in the Future

  • Adam J. Levitin, Susan M. Wachter(Authors)
  • 2020(Publication Date)
  • Harvard University Press

    (Publisher)

  of Governors of the Fed. Reserve Sys., Statistical Release Z.1, Financial Accounts of the United States , tbls. L.218–219 (providing data for 1952–present); Leo Grebler et al. , Capital Formation in Residential Real Estate: Trends and Prospects 468–71, tbl.N-2 (1956) (data for 1948–1951). 0% 10% 20% 30% 40% 50% 60% 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Share of Residential Mortgage Debt Outstanding Noninstitutional Commercial Banks Savings Institutions Insurance Companies Private-Label MBS Pools Agency/GSE Portfolio and MBS Other The Rise of Securitization • 67 plicated transactions, and we will explore them in more detail in this chapter, but for now, it is only necessary to understand that they involve the issuance of bonds, the repayment of which comes from the payments on a discrete pool of mortgage loans. Several distinct types of Securitization emerged in the US housing finance market: Ginnie Mae, Fannie Mae, Freddie Mac, and “private-label” secu-ritization. The differences are extremely important in our story, and we will delve into them in some detail. But from a big-picture view, it is also impor-tant to keep sight of the commonalities of Securitization, namely, its po-tential benefits and risks. There are three substantial benefits from Securitization relative to balance- sheet financing. First, Securitization potentially facilitates a much greater diversification of investment. Whereas an S&L is intensely exposed to the housing market in the local community in which it lends, a Securitization can be backed by a diversified, nationwide pool of mortgages. Second, the funds invested in a Securitization are locked in and not redeemable, so there is no risk of a mismatch between asset and liability durations. Third, secu-ritization is amenable to “structuring,” which is the allocation of risks to investors on something other than a pro-rated basis.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Economics of Banking

  • Kent Matthews, John Thompson(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  ABS offers banks the chance of relief from pressures arising from capital shortages as well as offering the opportunity to raise funds at a lower cost than through the normal channels. Banks can also achieve greater portfolio diversification and, hence, reduction in risk. However, Securitization may provide additional risk to the economy. 9.7 SUMMARY • Securitization refers to two processes. The first involves the process of disinterme- diation. The second relates to asset-backed Securitization. • Banks earn fee income from helping firms to issue securities when firms raise funds directly from the capital market. • Banks conduct Securitization as a means of easing the restraints due to imposed capital-to-asset ratios, and as a means of lowering the costs of attracting funds. • ABS may be beneficial to the economy as a whole through increased liquidity and reductions in the cost of raising funds. On the other hand, the potential for increased financial distress may be increased when a downturn in the economy occurs. QUESTIONS 1 Financial intermediation can be considered as a bundle of separate services. What are these separate components? 2 What factors explain the growth of Securitization? 3 What are (a) NIFs, (b) FRNs and (c) commercial paper? Does the growth of these harm banks? 4 What are the three categories of Securitization arranged through financial markets? Securitization 155 5 What is asset-backed Securitization? How are the securities issued? 6 How do banks gain from asset-backed Securitization? TEST QUESTIONS 1 Discuss the implications of Securitization for the long-term future of banking. 2 What is Securitization? Comment on its significance for international banking. 156 THE ECONOMICS OF BANKING

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Credit Risk: From Transaction to Portfolio Management

  • Andrew Kimber(Author)
  • 2003(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  4 Securitization The arrangement is advantageous to a number of independent parties including the investor and original owner of the assets. The main advantage to the parent company is that the balance sheet is ‘freed up’, because it is the recipient of the proceeds from the sale of the assets to the newly created entity. 1 The investor on the other hand is able to invest in an asset which matches his yield and maturity requirements. Indeed one of the major considerations when structuring a Securitization is the requirement to create securities with characteristics which match the investor profile. Figure 4.1 shows a simplified arrangement typical of most secur-itizations. The servicer represents the pools of assets and sometimes is responsible for the administrative aspects to their operation. (This latter function is critical to the valuation of the asset pool.) Moving from left to right, we then have the issuer which represents the distinct legal entity and finally the resulting issues which will be issued and possi-bly trade actively in the secondary debt capital markets. Figure 4.2 reveals in a little more detail the main parties involved in a Securitization deal. The extra players are the trustees who adminis-ter the issuance vehicle; referred to as the special purpose vehicle (SPV) which may be a corporation or trust, on behalf of the investors ensuring the resulting obligations in terms of interest and principal payments are met. A key characteristic of the SPV is the ‘bankruptcy remoteness’; this is achieved in part by the economic removal of the assets from the servicer. The SPV is a separate legal entity which, in the case of a ‘true sale’, purchases the assets from the selling party and subsequently issues market securities. As mentioned, not all Securitizations physically transfer the collateral. Some are just mediating the economic risk, in which case the economic risk is transferred.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Securitization

  Structuring and Investment Analysis

  • Andrew Davidson, Anthony Sanders, Lan-Ling Wolff, Anne Ching(Authors)
  • 2004(Publication Date)
  • Wiley

    (Publisher)

  The difference between the United States and Europe is that, in the United States, Securitization is looked on as one of the standard weapons in a chief financial officer’s funding arsenal. In CHAPTER 28 Structuring Asset-Backed Securities in Europe Europe, Securitization is still greeted with suspicion. However, the key mo- tivations for Securitization in Europe remain the same as in the United States: Selling risks Cheaper funding Diversification of funding sources Balance sheet optimization Regulatory and/or tax arbitrage There continues to be a heavy debate in Europe regarding the validity of Securitization, and convincing the originator of the benefit is half the battle to completing a deal. Once the originator has decided to move forward with a Securitization, the motives for that decision are the start in deciding how the assets should be transformed into a bond. For example, if the origina- tor’s main motive is balance-sheet optimization, special care must be taken to ensure that the sale of the assets to the special-purpose vehicle (SPV) will be characterized as a true sale and that the relevant regulators are satisfied that the risks to the originator have been sold with the assets. If the origina- tor views the transaction as simply a financing, then the true sale character may not be an issue at all, and the focus will be on minimizing credit en- hancement in order to obtain the best levels of financing. Whatever the mo- tivations, structuring in Europe is an open field for innovation. ASSESSING THE COLLATERAL The first step to structuring a Securitization deal is to scrutinize the assets. Your three goals are to: (1) understand the asset and assess risk factors; (2) model the cash flows; and (3) quantify risk factors via stress tests or other techniques. Understanding the Asset Every type of collateral will have its own individual features, and your job is to find out what these are.

  Sign up to read

  Learn more about book