The Securitization Process
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Asset Securitization
L-Sec Comptroller of the Currency Administrator of National Banks Asset Securitization Comptroller’s Handbook November 1997 L Liquidity and Funds Management Asset Securitization Table of Contents Introduction 1 Background 1 Definition 2 A Brief History 2 Market Evolution 3 Benefits of Securitization 4 Securitization Process 6 Basic Structures of Asset-Backed Securities 6 Parties to the Transaction 7 Structuring the Transaction 12 Segregating the Assets 13 Creating Securitization Vehicles 15 Providing Credit Enhancement 19 Issuing Interests in the Asset Pool 23 The Mechanics of Cash Flow 25 Cash Flow Allocations 25 Risk Management 30 Impact of Securitization on Bank Issuers 30 Process Management 30 Risks and Controls 33 Reputation Risk 34 Strategic Risk 35 Credit Risk 37 Transaction Risk 43 Liquidity Risk 47 Compliance Risk 49 Other Issues 49 Risk-Based Capital 56 Comptroller’s Handbook i Asset Securitization Examination Objectives 61 Examination Procedures 62 Overview 62 Management Oversight 64 Risk Management 68 Management Information Systems 71 Accounting and Risk-Based Capital 73 Functions 77 Originations 77 Servicing 80 Other Roles 83 Overall Conclusions 86 References 89 ii Asset Securitization Introduction Background Asset securitization is helping to shape the future of traditional commercial banking. By using the securities markets to fund portions of the loan portfolio, banks can allocate capital more efficiently, access diverse and cost- effective funding sources, and better manage business risks. But securitization markets offer challenges as well as opportunity. Indeed, the successes of nonbank securitizers are forcing banks to adopt some of their practices. Competition from commercial paper underwriters and captive finance companies has taken a toll on banks’ market share and profitability in the prime credit and consumer loan businesses. -
Financial Literacy and Portfolio Diversification
WORKING PAPER NO. 212 Financial Literacy and Portfolio Diversification Luigi Guiso and Tullio Jappelli January 2009 University of Naples Federico II University of Salerno Bocconi University, Milan CSEF - Centre for Studies in Economics and Finance DEPARTMENT OF ECONOMICS – UNIVERSITY OF NAPLES 80126 NAPLES - ITALY Tel. and fax +39 081 675372 – e-mail: [email protected] WORKING PAPER NO. 212 Financial Literacy and Portfolio Diversification Luigi Guiso and Tullio Jappelli Abstract In this paper we focus on poor financial literacy as one potential factor explaining lack of portfolio diversification. We use the 2007 Unicredit Customers’ Survey, which has indicators of portfolio choice, financial literacy and many demographic characteristics of investors. We first propose test-based indicators of financial literacy and document the extent of portfolio under-diversification. We find that measures of financial literacy are strongly correlated with the degree of portfolio diversification. We also compare the test-based degree of financial literacy with investors’ self-assessment of their financial knowledge, and find only a weak relation between the two measures, an issue that has gained importance after the EU Markets in Financial Instruments Directive (MIFID) has required financial institutions to rate investors’ financial sophistication through questionnaires. JEL classification: E2, D8, G1 Keywords: Financial literacy, Portfolio diversification. Acknowledgements: We are grateful to the Unicredit Group, and particularly to Daniele Fano and Laura Marzorati, for letting us contribute to the design and use of the UCS survey. European University Institute and CEPR. Università di Napoli Federico II, CSEF and CEPR. Table of contents 1. Introduction 2. The portfolio diversification puzzle 3. The data 4. -
Understanding Securitization
Understanding Securitization It is important to have a general familiarity with mortgage securitization in order to understand the foreclosure process. Securitization involves a series of conveyances of the note evidencing the residential loan and assignment of the mortgage or trust deed securing it. Therefore, chain of title and beneficial interest issues frequently turn on the securitization trajectories. Securitization is the process pooling loans into “mortgage‐ backed securities” or “MBS” for sale to investors. MBS is an investment instrument backed by an undivided interest in a pool of mortgages or trust deeds. Income from the underlying mortgages is used to pay interest and principal on the securities. Figure A below is a simplified schematic depicting the general securitization process and some of the parties involved. The process begins with Originators, which are the lenders (such as banks or finance companies) that initially make the loans to homeowners. Sponsor/Sellers (or “sponsors”) purchase these loans from one or more Originators to form the pool of assets to be securitized. (Most large financial institutions are both Originators and Sponsor/Sellers.) A Depositor creates a Securitization Trust, a special‐purpose entity, for the securitized transaction. The depositor acquires the pooled assets from the Sponsor/Seller and in turn deposits them into the Securitization Trust. An Issuer acquires the Securitization Trust and issues certificates to eventually be sold to investors. However, the Issuer does not directly offer the certificates for sale to the investors. Instead, the Issuer conveys the certificate to the Depositor in exchange for the pooled assets. An Underwriter, usually an investment bank, purchases all of the certificates from the Depositor with the responsibility of offering to them for sale to the ultimate investors. -
Securitization & Hedge Funds
SECURITIZATION & HEDGE FUNDS: COLLATERALIZED FUND OBLIGATIONS SECURITIZATION & HEDGE FUNDS: CREATING A MORE EFFICIENT MARKET BY CLARK CHENG, CFA Intangis Funds AUGUST 6, 2002 INTANGIS PAGE 1 SECURITIZATION & HEDGE FUNDS: COLLATERALIZED FUND OBLIGATIONS TABLE OF CONTENTS INTRODUCTION........................................................................................................................................ 3 PROBLEM.................................................................................................................................................... 4 SOLUTION................................................................................................................................................... 5 SECURITIZATION..................................................................................................................................... 5 CASH-FLOW TRANSACTIONS............................................................................................................... 6 MARKET VALUE TRANSACTIONS.......................................................................................................8 ARBITRAGE................................................................................................................................................ 8 FINANCIAL ENGINEERING.................................................................................................................... 8 TRANSPARENCY...................................................................................................................................... -
Private Mortgage Securitization and Loan Origination Quality - New Evidence from Loan Losses
Private Mortgage Securitization and Loan Origination Quality - New Evidence from Loan Losses Abdullah Yavas Robert E. Wangard Chair School of Business University of Wisconsin - Madison Madison, WI 53706 [email protected] and Shuang Zhu Associate Professor Department of Finance Kansas State University Manhattan, KS 66506 [email protected] December 11, 2018 1 Private Mortgage Securitization and Loan Origination Quality - New Evidence from Loan Losses Abstract Due to data constraints, earlier studies of the impact of securitization on loan quality have used default probability as a proxy for loan quality. In this paper, we utilize a unique data set that allows us to use loan losses, which incorporate both probability of default and loss given default, to proxy for mortgage quality. Our analysis of prime loans shows that higher expected loan losses are associated with higher probability of securitization. Lenders sell prime loans with lower observable quality and keep higher observable quality loans on their books. For subprime loans, we observe opposite results that lenders sell better quality loans and keep lower quality loans on their book. We then use the cutoff FICO score of 620 to infer the lender’s screening effort with respect to unobservable loan quality. We find that securitized prime loans exhibit no significant difference in default losses for 620- versus 620+ loans. However, securitized subprime loans with a 620- score incur significantly lower loan losses than securitized subprime loans with a 620+ score. By using loan losses as the proxy of loan quality, separating the analysis into prime and subprime samples, and distinguishing between observable and unobservable risk characteristics, this study sheds additional light on the potential channels that the securitization affects loan quality. -
Arbitrage Pricing Theory
Federal Reserve Bank of New York Staff Reports Arbitrage Pricing Theory Gur Huberman Zhenyu Wang Staff Report no. 216 August 2005 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Arbitrage Pricing Theory Gur Huberman and Zhenyu Wang Federal Reserve Bank of New York Staff Reports, no. 216 August 2005 JEL classification: G12 Abstract Focusing on capital asset returns governed by a factor structure, the Arbitrage Pricing Theory (APT) is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT, however, does not preclude arbitrage over dynamic portfolios. Consequently, applying the model to evaluate managed portfolios is contradictory to the no-arbitrage spirit of the model. An empirical test of the APT entails a procedure to identify features of the underlying factor structure rather than merely a collection of mean-variance efficient factor portfolios that satisfies the linear relation. Key words: arbitrage, asset pricing model, factor model Huberman: Columbia University Graduate School of Business (e-mail: [email protected]). Wang: Federal Reserve Bank of New York and University of Texas at Austin McCombs School of Business (e-mail: [email protected]). This review of the arbitrage pricing theory was written for the forthcoming second edition of The New Palgrave Dictionary of Economics, edited by Lawrence Blume and Steven Durlauf (London: Palgrave Macmillan). -
Building Efficient Hedge Fund Portfolios August 2017
Building Efficient Hedge Fund Portfolios August 2017 Investors typically allocate assets to hedge funds to access return, risk and diversification characteristics they can’t get from other investments. The hedge fund universe includes a wide variety of strategies and styles that can help investors achieve this objective. Why then, do so many investors make significant allocations to hedge fund strategies that provide the least portfolio benefit? In this paper, we look to hedge fund data for evidence that investors appear to be missing out on the core benefits of hedge fund investing and we attempt to understand why. The. Basics Let’s start with the assumption that an investor’s asset allocation is fairly similar to the general investing population. That is, the portfolio is dominated by equities and equity‐like risk. Let’s also assume that an investor’s reason for allocating to hedge funds is to achieve a more efficient portfolio, i.e., higher return per unit of risk taken. In order to make a portfolio more efficient, any allocation to hedge funds must include some combination of the following (relative to the overall portfolio): Higher return Lower volatility Lower correlation The Goal Identify return streams that deliver any or all of the three characteristics listed above. In a perfect world, the best allocators would find return streams that accomplish all three of these goals ‐ higher return, lower volatility, and lower correlation. In the real world, that is quite difficult to do. There are always trade‐ offs. In some cases, allocators accept tradeoffs to increase the probability of achieving specific objectives. -
The Impact of Portfolio Financing on Alpha Generation by H…
The Impact of Portfolio Financing on Alpha Generation by Hedge Funds An S3 Asset Management Commentary by Robert Sloan, Managing Partner and Krishna Prasad, Partner S3 Asset Management 590 Madison Avenue, 32nd Floor New York, NY 10022 Telephone: 212-759-5222 www.S3asset.com September 2004 Building a successful hedge fund requires more than just the traditional three Ps of Pedigree, Performance and Philosophy. As hedge funds’ popularity increases, it is increasingly clear that Process needs to be considered the 4th P in alpha generation. Clearly, balance sheet management, also known as securities or portfolio financing, is a key element of “process” as it adds to alpha (the hedge fund manager’s excess rate of return as compared to a benchmark). Typically, hedge funds surrender their balance sheet to their prime broker and do not fully understand the financing alpha that they often leave on the table. The prime brokerage business is an oligopoly and the top three providers virtually control the pricing of securities financing. Hedge funds and their investors therefore need to pay close heed to the value provided by their prime broker as it has a direct impact on alpha and the on-going health of a fund. Abstract As investors seek absolute returns, hedge funds have grown exponentially over the past decade. In the quest for better performance, substantial premium is being placed on alpha generation skills. Now, more than ever before, there is a great degree of interest in deconstructing and better understanding the drivers of hedge fund alpha. Investors and hedge fund managers have focused on the relevance of asset allocation, stock selection, portfolio construction and trading costs on alpha. -
The Role of Gold in Today's Global Multi-Asset Portfolio
Gold October 2019 The Role of Gold in Today’s Global Multi-Asset Portfolio SPDR® Gold Strategy Team Investors have often used gold tactically in their portfolios, with an aim to help preserve wealth during market corrections, times of geopolitical stress or persistent dollar weakness. But given gold’s historically low or negative correlation with most other asset classes (See Figures 2 and 3), we believe that in addition to gold’s tactical benefits, its function as a core diversifying asset may demonstrate that gold can potentially play a more long-term strategic role in an investor’s portfolio. In fact, research has shown that the modern multi-asset portfolio may be more efficient with a strategic allocation to gold playing a crucial role as a potential core diversifier.1 In this paper, we examine how including gold in a hypothetical multi-asset portfolio that also includes global stocks, various classes of fixed income, real estate, private equity, and commodities may improve its risk-return characteristics. We found that holding between 2% and 10% of SPDR® Gold Shares (GLD®) between January 1, 20052 and September 30, 2019 may have improved the hypothetical portfolio’s cumulative returns and Sharpe ratio and lowered its maximum drawdown, as compared to a portfolio without any gold-backed investments. See Figure 7 for asset weightings of hypothetical portfolios. Gold as an Investable Since 1971, when President Nixon removed the US dollar from the gold standard, the price of gold Asset: From IPO to ETF has increased from $43.28/oz. to $1,485.30/oz at the end of September 2019. -
The Role of the Secondary Market in Mortgage Financing | 2 Limiting the Secondary Market Would Share of Mortgages on Balance Sheets at 30 Percent
Economic Policy Program Housing Commission The Role of the Secondary Market in Mortgage FinancingTotal Mortgages Outstanding (total $13.1 trillion) Home ($9.8 trillion) 75% Multifamily Residential ($0.9 trillion) 7% Commercial, e.g. offices, retail, factories ($2.2 trillion) 17% Farm ($0.2 trillion) 1% The secondary market for mortgages Mortgages: A $13.1 Trillion Market Notes: plays a critical role in sustainingThese lines The taken current verbatim size of the from mortgage one-‐line market is totals of L.217 $13.1 trillion, the a healthy housing market. Few largest share of which (75 percent) funds home mortgages. As displayed in Chart 1, another 7 percent of the mortgage homebuyers have sufficient savings market fundsTotal mortgagesMortgages Oonu tapartmentstanding (t obuildingstal $13.1 and other to purchase a home outright, and multifamily properties. trillion) many need to borrow money to buy their first home or to move to another Chart 1: Total Mortgages Outstanding ($13.1 trillion) 1% one. Without the ability to borrow against the value of the home they are 17% purchasing, many prospective buyers 7% would be shut out of the market. The secondary market allows participants 75% in our mortgage system to access capital from investors in the United States and around the world. Any decline in the size of the secondary market would reduce the amount of Home ($9.8 trillion) Multifamily Residential ($0.9 trillion) capital available for mortgage lending Commercial, e.g. offices, retail, factories ($2.2 trillion) and, in turn, borrowers’ options for Farm ($0.2 trillion) financing the purchase of a home. -
On the Securitization of Student Loans and the Financial Crisis of 2007–2009
On the Securitization of Student Loans and the Financial Crisis of 2007–2009 by Maxime Roy Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at Tepper School of Business Carnegie Mellon University May 16, 2017 Committee: Burton Hollifield (chair), Adam Ashcraft, Laurence Ales and Brent Glover External Reader: Pierre Liang À Françoise et Yvette, mes deux anges gardiens. abstract This dissertation contains three chapters, and each examines the securitization of student loans. The first two chapters focus on the underpricing of Asset-Backed Securities (ABS) collateralized by government guaranteed student loans during the financial crisis of 2007–2009. The findings add to the literature that documents persistent arbitrages during the crisis and doing so in the ABS market is a novelty. The last chapter focuses on the securitization of private student loans, which do not benefit from government guarantees. This chapter concentrates on whether the disclosure to investors is sufficient to prevent the selection of underperforming pools of loans. My findings have normative implications for topics ranging from the regulation of securitization to central banks’ exceptional provision of liquidity during crises. Specifically, in the first chapter, “Near-Arbitrage among Securities Backed by Government Guaranteed Student Loans,” I document the presence of near-arbitrage opportunities in the student loan ABS (SLABS) market during the financial crisis of 2007–2009. I construct near-arbitrage lower bounds on the price of SLABS collateralized by government guaranteed loans. When the price of a SLABS is below its near-arbitrage lower bound, an arbitrageur that buys the SLABS, holds it to maturity and finances the purchase by frictionlessly shorting short-term Treasuries is nearly certain to make a profit. -
Hyundai Auto Lease Securitization Trust 2020-B
Presale: Hyundai Auto Lease Securitization Trust 2020-B September 15, 2020 PRIMARY CREDIT ANALYST Preliminary Ratings Ethan Choi New York Preliminary amount Legal final (1) 212-438-1043 Class(i) Preliminary rating Type Interest rate(ii) (mil. $) maturity ethan.choi A-1 A-1+ (sf) Senior Fixed 142.00 Oct. 15, 2021 @spglobal.com A-2 AAA (sf) Senior Fixed 380.00 Jan. 17, 2023 SECONDARY CONTACT A-3 AAA (sf) Senior Fixed 380.00 Sept. 15, 2023 Sanjay Narine, CFA Toronto A-4 AAA (sf) Senior Fixed 74.39 June 17, 2024 + 1 (416) 507 2548 B AA+ (sf) Subordinate Fixed 52.94 Oct. 15, 2024 sanjay.narine @spglobal.com Note: This presale report is based on information as of Sept. 15, 2020. The ratings shown are preliminary. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. This report does not constitute a recommendation to buy, hold, or sell securities. (i)All or a portion of one or more classes of notes may be initially retained by the sponsor Hyundai Capital America Inc. or its affiliate. (ii)The actual coupons of these tranches will be determined on the pricing date. Profile Expected closing date Sept. 23, 2020. Collateral Prime auto lease receivables. Origination trust Hyundai Lease Titling Trust. Issuer Hyundai Auto Lease Securitization Trust 2020-B. Sponsor, servicer, and administrator Hyundai Capital America Inc. (BBB+/Negative/A-2). Depositor Hyundai HK Lease LLC. Indenture trustee U.S. Bank N.A.