Index

Accounting standards, 68n Arbitrage cash CDOs, 244–247 Accounting , absence. See Synthetic CDOs assets, 245–246 Accretion-directed bonds, 50–55 fl owchart, 245f classes legal structure, 245 creation, 51 reinvestment period, 246 specialization, 54 returns, 246–247 Accretion process, 50 Arbitrage CDOs, 215–216, 243–249 Accrual bonds (Z bonds), 50–55 assets, purchase, 216 class examples, 243 structure, comparison, 52 issuance, capability, 243–244 structuring, 54 pooling process, profi t source, 243 lockout period, months (number), 51 purpose, 243–244 par value, lockout period (addition), 50 relevance, 219–220 Actual/365 day count, usage. See Sterling-denomi- returns, 246–247 nated swaps example, 247t Administrative agent. See Asset-backed commercial Arbitrage conduits, 173 paper S&P defi nition, 172 duties, 179. See also Commercial paper Arbitrage-free model, 331 role, 180 Arbitrage synthetic CDOs, 247–249 Administrative receivership, usage, 199–200 collateral manager, appointment, 248 Agency CMOs creation, 248–249 creation, 65 fl owchart, 249t qualifi cation, 31n. See also Nonagency CMOs income, 248–249 usage, 75 ramp-up period, 248 Agency costs, reduction, 284 Arbitraging, purpose, 314–315 Agency deals, 22n Asset-aging analysis, usage. See Servicers arbitrage transactions, 65 Asset-backed bonds, 10 structuring, 34, 38 Asset-backed commercial paper Agency MBS deals, structuring, 31 placement agent, involvement, 180 summary, 61–64 Asset-backed commercial paper (ABCP), 10 Agency passthrough securities, alterna- administrative agent, involvement, 179–180 tive, 329n bank usage, 170 Agreed-upon periodic interest rate, 101–102 collateral, 174 American Skandia Life Assurance Company (ASLAC), deleverage triggers, usage, 176–177 securitization transactions issuance, 205 initiation, 170 Amortization issuance programs, 170 calculation, 35 issuing agent, involvement, 180 triggers. See EarlyCOPYRIGHTED amortization triggers manager, MATERIAL involvement, 180 Amortizing , notional amount (decline), 108 paying agent, involvement, 180 Annualized percentage rates (APRs), 164 program Arbitrage. See Securities parties, involvement, 178–180 activity, impact, 279 sponsor, involvement, 178–179 profi ts, making, 216 structure. See Partially supported multiseller term, usage, 211–212 ABCP program structure looseness, 243 securitization, relationship, 173 transactions, 65 Asset-backed commercial paper (ABCP) conduits, diversifi cation, attainability, 232 169. See also Multiple-seller ABCP conduits; ramp-up risks, impact, 269 Single-seller ABCP conduits

349

iindex.inddndex.indd 349349 55/31/08/31/08 88:26:47:26:47 PMPM 350 INDEX

Asset-backed commercial paper (Cont.) perpetual life, absence, 67 assets, credit quality, 181–182 proceeds, maximization, 24 going concerns, 173 Assets/existing receivables, usage, 7 management, quality, 181 Assets/receivables, initiation, 7 rating, 180–182 Auction call, 219n receivables eligibility criteria, 182 Auto leases, 314 summary, 182–185 Auto loan deals, 164 types, 170–173 Auto loan securitization, 161–165 Asset-backed notes, 10 collateral quality, 163 Asset-backed obligations, 10 credit enhancements, 164 Asset-backed pools, 152 funding vehicles, 162 Asset-backed securities (ABSs), 211. See also issues, 164–165 Mortgage-related asset-backed securities refi nancing signifi cance, 162 cash fl ow, 326 retail loan pool support, 212 yield measure, 327 structures, 164–165 collateral classes, 149 Automatic deleverage triggers, usage, 258n summary, 165–167 Available funds cap, inclusion, 113n creation, 283–284 Average life. See classes; Collateral; Planned differences, 173 amortization class bonds investor problems, 17 examination. See Bond classes market, 92–93 expected , contrast, 43n transaction, payment problem, 318 valuation, 325 Backup servicer, 125, 142. See also Cold backup ser- Asset-backed transactions, relation, 187 vicer; Hot backup servicer; Warm backup servicer Asset-based lending, 5 classifi cation, 142 Asset pool Balance sheet assets, amount, 190–191 base case loss, 96 Balance sheet cash CDOs, fl owchart, 231f diversifi cation, 85 Balance sheet CDOs, 211, 215–216, 229–243, 311 identifi cation, 68–69 assets, 231 long-term assets, inclusion, 79 creation, 229–230 losses, absorption, 15 process, 230 principal balance, replenishment, 155 credit enhancement structure, 233 Assets, 149–150 diversity, 231–232 acquisition, synthetic mode, 215 legal structure, 230–231 classes, 153f loans, selection criteria, 232–233 classifi cation, 151f regulatory/economic capital relief, 216 credit quality. See Asset-backed commercial reinvestment period, 232–233 paper conduits structural tests, 233–234 credit risk, 17–18 Balance sheet synthetic CDO, fl ow chart, 237f coverage, pool level enhancement (usage), 176 Balance sheet transactions, asset allotment, 232 distribution, 6 Banc One, credit card receivables (purchase), 154 duration/liabilities, mismatch, 17–18 Bank for International Settlements (BIS) future fl ows, contrast, 150 defi nition. See Structured fi nance interest rate risk, 17–18 recognition. See Securitization originator sale, 7–8 Banking, health, 224–225 pooling, 4 Bank lockbox, usage, 126 portfolio, 156 Bank One, N.A. v. Poulsen, et al., 145 quality tests, 255–256 Bank risk risks, 270 capital, inadequacy, 293 seasoning, 70 masking, 302 securitization opaqueness, increases, 300–302 cash fl ow, presence, 149 Bankruptcy selection, 69–70 defi nition, inapplicability, 317–318 tests, 257–260 protection. See Whole business securitization types, 7–8, 68 Bankruptcy-remote entity, SPV structuring, 15 unavailability, risk, 269 Bankruptcy remote structure, 6 value, computation, 258–259 Banks Asset securitization adverse impact, 293 issuer motivation, 13 facilities, liquidity enhancement source, 78 summary, 24–27 loan sale, BusinessWeek observation, 294

iindex.inddndex.indd 350350 55/31/08/31/08 8:26:488:26:48 PMPM Index 351

Barclays, conduit setup, 170 Bullet repayment, providing. See Liabilities Base case loss, 95. See also Asset pool Business continuity planning. See Servicing multiplication, 96–97 Business securitization. See Block of business Basel I, 69 securitization Basel II, 69 Buyer, term (usage), 116 capital requirement, 293 defi nition. See Operational risk Callable agency debentures, valuation, 329 Base rate, 160 Call back , constraint, 242n Basis mismatch, relationship. See Interest rates Capital Basis risk, 111–112 banking regulations, 69 mitigation, 111–112 credit enhancement replacement, 173 shortfall, coverage, 113 inadequacy. See Bank risk Basket default swaps, 313 management. See Regulatory capital Basket trades, 313 notes, issuance, 173 Bear Stearns Asset Backed Securities 1 Trust 2005- providing. See First-loss risk HE5 Asset-Backed Certifi cates, Series 2005- raising, 3 HE5 issue (prospectus supplement), 114–115 relief, 150 Benefi cial interest certifi cates. See Pass-through source, usage, 15 certifi cates structure, equity cost. See Securitization Berkshire Hathaway Assurance, license, 92n Capital market Best execution, obtaining, 23–24 deals, 310–311 Bilateral deals/transactions, 310–311 counterparty/OTC deals, contrast, 311 Binary swaps, usage, 320 funding, raising, 187 BISTRO (JPMorgan), 243 Caps, 115–118. See also Interest rate cap Block of business securitization, 204–205 payout, compensation, 116 Bond classes. See Floating rate bonds; Prepayment- usage. See Securitization protected bond classes Cash asset CDO, asset acquisition, 213 average life, examination, 53 Cash CDO, 229–234 cash fl ow, range, 22–23 contrast. See Synthetic CDOs collateral backing, 15 structure, usage (initiation), 229 coupon rate, 39 synthetic CDO, contrast, 215 creation, 9, 56 Cash collateral account (CCA), 233 determination, 73–75 Cash collateral (cash reserve), 88–89 excess interest, combination, 61 account, creation, 88 existence, 10 Cash collateralization, impact, 89–90 issuance, average life, 47 Cash diversion, 113 PAC bonds, comparison, 48 Cash fl ow. See Floating rate bonds pay-down structure, selection, 76–77 allocation, rules (establishment), 23 simulated cash fl ows, 335t components, decomposition, 35 theoretical value, determination, 336–337 control, 199 time tranching, 75 projection. See Mortgage pool total par value, 39, 48, 58 simulation, 330–334 Bondholders, trust interest liability, 111–112 timing, 105–106 Bonds trapping. See Future fl ows analytics, 144 waterfall insurance, 92 scenarios, 201 market usage. See Whole business securitization exposure, 306 yield seniority, 306 analysis, 325–327 par value, comparison, 39n calculation, 326 principal paydown, interest (usage), 113n Cash fl ow-related EATs, 194 unavailability, risk, 269 Cash infl ow. See Life insurance business; London Book size reduction, absence. See Synthetic CDOs Interbank Offered Rate Borrower fi nancials, problems, 160–161 Cash investments, presence, 258 Borrowers, refi nance right, 328 Cash market instruments, package, 103–105 Bowie bonds, 3 Cash outfl ow. See Life insurance business Broad-based bond market indexes, mortgage Cash outlay, 105 sector, 287 Cash reserves. See Cash collateral Buffett, Warren, 92n liquidity enhancement source, 78 Bullet repaying notes, usage. See Synthetic CDOs maintenance, 193

iindex.inddndex.indd 351351 55/31/08/31/08 8:26:488:26:48 PMPM 352 INDEX

Cash securitization, 151 collateral/structural risks, 266–270 true sale structure basis, 237–238 proposals identifi cation, technological invest- Cash settlement, 308, 320–321 ments (usage), 263 Cash structures, 150–151 investor preference, 265–266 CDX.NA.IG (investment-grade names index), 251 key man provision, usage, 262 CDX.NA (index), 251 leverage, maintenance, 257–258 Certifi cates, 10. See also Pass-through certifi cates; management teams, staffi ng, 262 Pay-through certifi cates market, 224–225 Charge-offs, 159 composition, 225 rate, 159–160 growth, 225–226 Cheapest-to-deliver obligation, 308 pool quality, measures, 256–258 Chief fi nancial offi cer (CFO), installment sales popularity. See Structured fi nance CDOs contract usage, 8–9 portfolio manager, 261–264 Citibank (Citrioco LP // Ciesco), ABCP usage, 170 ramp-up period, 261 Citibank Credit Card Issuance Trust, Class 2003-A10 reinvesting structure, 232–233 Notes (fi xed rate interest payment), 109–110 retail pools, assumption, 218 City of Chandler, et al., v. Bank One, N.A., et standardization, completion, 265–266 al., 145 static pools, presence, 232 Cleanup call, 219n strength/stability, advantage, 265 Cold backup servicer, 142 structure, 221t–223t Collateral. See Asset-backed commercial paper correlation risk, 266–267 amount, posting, 119 exemplifi cation, 217–220 average life, 42–43 rating agency assumptions, 267 cash fl ow, generation, 334 structuring/analysis, 255 characteristics, 33 summary, 270–272 classes study, reasons, 211–212 classifi cation basis, 149–151 summary, 227–228 types, 152–153 synthetic technology, usage, 212 features, 218 terminology, 212–213 fl oating rate, 108–109 transaction, objective, 219 liquidation value, 6 transparency, availability, 266 losses, coverage, 113 types, 213–217, 229 par value, comparison, 39n collateral basis, 216–217 quality, 163 summary, 252–254 residual profi ts, 152 yield, impact, 266 structuring issue, 68–69 Collateralized debt obligations (CDOs) assets Collateralized bond obligations (CBOs) acquisition. See Cash asset CDO; Synthetic CDO reference, 213 ramping up process, 217 terminology, 212–213 selection, 219 Collateralized commodity obligations (CCOs), synthetic assets, equivalence, 248 213 Collateralized debt obligations (CDOs) manager, Collateralized debt obligations (CDOs), 151, 174, 261–264 306. See also Arbitrage CDO; Balance sheet distinction, Moody’s examination, 263, 264 CDOs; Hybrid CDO; Trust-preferred CDOs equity ownership, 264 arbitrage features, relevance, 219–220 experience, 262 arbitrage motivation, 211–212 S&P examination, 262 asset quality tests, 256–257 fees, 264 classifi cation, 214t internal control systems, importance, 263 corporate exposures, pool, 212, 217 qualities, 261–264 credit enhancements, usage, 219 reinvestment option, usefulness (S&P examina- diversifi cation, capability, 265 tion), 269 diversifi cation/leverage, balancing, 217 Collateralized debt obligations (CDOs) pool diversity tests, 257–258 bottom-up approach, 218 economic drivers, 220–224 default probability, statistical analysis, 218 equity/debt investors, balance, 263–264 diversity, 220 fi nancial resources, usage, 263 granularity, 218 granularity, loss, 270 internal correlation, 218 inclusion, 155 top-down approach, 218 introduction, 211 Collateralized exchange obligations (CXOs), 213 investment, 265–266 Collateralized fund obligations (CFOs), 213

iindex.inddndex.indd 352352 55/31/08/31/08 8:26:488:26:48 PMPM Index 353

Collateralized loan obligations (CLOs) Conditional sales, usage, 162 commercial/industrial loans, securitization Conduits. See Arbitrage conduits; Asset-backed (usefulness), 285 commercial paper conduits; Hybrid conduits; term, restriction, 213 Multiseller conduits terminology, 212–213 asset type basis, 172–173 Collateralized mortgage obligations (CMOs), 31 comparison. See Special purpose vehicle creation, impact. See Prepayments credit enhancement structure, 174–177 market, RMBS transaction migration, 212–213 fi nancing. See Repo/TRS conduit markets implication, 170 limitation, 55–56 liquidity support basis, 171 problems, 49 net worth, 177 qualifi cation. See Agency CMOs; Nonagency rating, 181–182 CMOs seller number basis, 171 Collateralized synthetic obligations (CSOs), 213 setup. See Barclays Collection/servicing function, 124 structure. See Multiseller conduit transfer, 6n underwriting criteria, review, 181 Commercial fi nance services, 130–131 variant. See Fully supported conduits Commercial loans, 130 Confi dence levels, requirement, 95 Commercial mortgage-backed fi nance servicers, Connected mismatches, 267 132–135 Conseco Finance, securitization transaction (ser- asset management recommendations, documen- vicing fees fi xation), 141 tation, 134 Consolidation, requirement (determination), 20n collateral value, material fl uctuations (monitor- Consolidation of Variable Interest Entities. See ing), 133 Financial Accounting Standard Board in-house staff property manager fi nancial Constant treasury maturity (CMT) index, 112 reporting, 135 Consumer fi nance abilities. See Servicers integrated watchlist, maintenance, 134 Consumer fi nance servicers master servicers, 133–134 abilities, 130–131 pooling/servicing agreement, tracking ability, charge-off policy, maintenance, 131 133 collection procedures, 130 primary servicers, 132–133 controls, demonstration, 130 special servicers, 134–135 recovery performance history, 130–131 subservicer delinquency reporting, tracking, 134 Contingent deferred sales charges (CDSCs), 205 third-party property managers, maintenance, Contraction risk 135 acceptance. See Support bonds trust assets/expenses, management, 134 concern, 43 wire remittance procedures, 133 protection, 50 Commercial mortgage-backed securities (CMBSs) Controlling fi nancial interest, defi nition, 19 portfolios, standards, 132 Convexity, 341–342. See also Effective convexity transactions, 125 measure, 339 Commercial Mortgage Securities Association Corporate bonds, valuation, 329 (CMSA), investor reporting package, 143 , usage, 329n Commercial paper (CP), 169 Corporate credit environment, 314 conduit issuer, 174–175 Corporate entity securitization, 195 conduit repayment failure, 177 Corporate exposures, pool. See Collateralized debt issuance/repayment, administrative duties, 179–180 obligations meanings, 169n Corporate funding, claims (prioritization), 90–91 rate, 112 Corporate risk management, 17–18, 67–68 term, relation, 169–170 Corporate securitization, 195 Committee on Oversight and Government Correlation risk, 266–267 Reform, Subcommittee on Domestic Policy, Counterparties, 101 296–297 deals, contrast. See Capital market Companion bonds, 46 exposure, acquisition, 305 Company-related EATs, 194 , 102f Comparable, term (defi nition), 327 replacement, location, 118–119 Concentration limits, 256 risk, 103, 118–120. See also Exchange-traded Conditional prepayment rate (CPR), 32–35 options; Futures approach, mutual exclusivity, 33n Counterparty risk, impact, 101 percentage, 34–35 Coupon leverage, 59. See also Multiple leverage usage, 33 Coupon rate, requirement, 60

iindex.inddndex.indd 353353 55/31/08/31/08 8:26:488:26:48 PMPM 354 INDEX

Coupon reset formula. See Inverse fl oating rate indication, 87 tranche level, 77 Covenants mechanism, 86–93 breach, 199–200 usage, 22 maintenance, 144 OC, usage, 280 Coverage, dollar amount, 93 quantifi cation, 94 Credit assets sizing, 93–97 returns, volatility risk, 307–308 determination, 96 risk, stripping, 150–151 historical mortality table, usage, 94–95 synthetic creation, 214–215 source, 77 Credit card ABS, SIFMA estimates, 154–155 structure. See Balance sheet CDOs; Conduits Credit card companies, interest income/fi nance subordination, relevance, 199 charges, 153 summary, 97–100 Credit card receivables, 153–161 usage. See Collateralized debt obligations delinked structure, 158 Credit-enhancing interest-only (IO) strip, 89 discrete trust structure, 156–157 Credit event, 214, 316–318 funding exposure, 154 defi ning, 307 interest, allocation, 157 occurrence, absence, 310 master trust structure, 156–157 payments, 308 principal/prepayments, allocation, 157–158 Credit histories, problems, 21–22 seller interest, 156 Credit-linked note (CLN), 316, 323 transaction structure, 155–158 Credit-linked security, 316 Credit card securitization Credit rating, level (signifi cance), 15 cases, 154–155 Credit risk deal, EATs, 161 analysis, 218 legal events, 161 commoditization, 305 performance events, 161 de-linking, 5 seller/servicer events, 161 elimination, 287–288 Credit card structure loans, concern, 294–295 base rate, 160 originator performance risk, separation, 191 charge-offs, 159 removal, 17–18 rate, 159–160 shift, credit derivatives device (development), 234 components, 158–160 slices, 7 credit scores, 159–160 Credit scores, 159–160 payment rate, 160 Credit support portfolio yield, 159 form, 89–90 servicing fee, 160 level, requirement, 74 Credit default swaps (CDSs), 309, 321–322 increase, 75 losses, occurrence, 248 sources/size, determination, 72–73 transaction, dealer template, 317–318 usage, 23 Credit derivatives. See Funded credit derivatives; Creditworthiness, compromise, 21–22 Unfunded credit derivatives Cross-currency risk, 268 basics, 305 C*Star (Citibank), 243 conversion, forms, 316 Cumulative losses, 79–80 deal, requirements, 307 stress test, 95 growth, 305–306 Currency risk, 191–192 investment products, transformation, 305–306 market, losses, 321 DaimlerChrysler, 162 notional value, 307 Davidson, Andrew, 297–298 senior unsecured loans, referencing, 309 Dealer template, 317–318. See also Credit default tenure, 319 swaps transaction, elements, 306–310 Debt funding, funding source cost, 281 types, 321–323 Debt holder, prepayment (impact), 31–32 Credit-enhanced transactions, 154 Debt investors, balance. See Collateralized debt Credit enhancement, 15, 85. See also Auto loan obligations securitization Debt service coverage ratio (DSCR), 193 amount/size, 85 calculations, 133 cost, factoring, 15–16 Debt-to-income ratio, 70 decision, 72–73 Default depletion, 177 history, 154

iindex.inddndex.indd 354354 55/31/08/31/08 8:26:488:26:48 PMPM Index 355

probability, 94 Enforcement event, occurrence, 202 risk, 103 Entity guarantee, obtaining, 119 swap, 309. See also Basket default swaps; Credit Entry barriers. See Whole business securitization default swaps Equal monthly installment (EMI) structure, loan Defaulted assets, fair market value/recovery rate, 258 amortization, 163 Default rate per annum, 96 Equipment leases, 130 Deleverage triggers, usage. See Asset-backed com- Equity mercial paper; Automatic deleverage triggers form, 66–67 Delinked structure. See Credit card receivables funding source cost, 281 funding pot, creation, 158 funds, 315 Delinquency/default, incidences, 21–22 investors, debt investors (balance). See Collater- Delinquency minimization. See Servicers alized debt obligations Delinquent consumer fi nance transactions, special market, exposure, 306 servicer abilities, 129–130 presence, 66 Deliverable obligations, 308 Euro-denominated swaps, fl oating rate payments, 106 Direct credit substitute, treatment, 171 Excess profi t, 86–88 Disaster recovery. See Servicing recognition, 68n Discrete trust, 156–157 Excess spread, 66, 86–88 structure. See Credit card receivables contrast, 89 Disintermediation, 3 cross-collateralization, 157 Distribution waterfall, deviation, 114 dollar amount, 87–88 Diversifi ed loans, pooling, 22 levels, decrease, 161 Diversity score, 256–257 nonpayment, 87 computation. See Pool retention/trapping, 66–67 table. See Moody’s Exchange-traded options, counterparty risk, 103 Diversity tests, 257–258 Existing asset securitizations, 8 Dividend decision, 65–66 Expected loss, 95 Document tracking. See Servicers Extension risk Dollar-per-loan count basis, 132 concern, 43 Dollar swaps, fl oating rate payments, 106 protection, absence, 50 Double taxation, avoidance. See Residual profi ts Downgrade history, 154 Failure to pay, defi nition (inapplicability), 317–318 Duration, 339–341. See also Effective duration Fair Debt Collection Practices Act (FDCPA) equation, 340 instruction. See Residential mortgage servicers measure, 339 training/compliance monitoring. See Residential Dynamic portfolio, 312 mortgage servicers; Servicers Fair Isaac and Company (FICO), credit scoring Early amortization triggers (EAT), 90, 158, 160–161. models, 159–160 See also Cash fl ow-related EATs; Company- FAS 140, 68n related EATs; Credit card securitization; Sover- usage, 240–241 eign-related EATs; Third-party-related EATs Fast-pay/slow-pay structure, credit support mitiga- legal events, 161 tion, 77 liquidity crisis, 161 FDIC: Issues Relating to the Failure of Superior performance events, 161 Bank 6th (Inspector General report), 301n seller/servicer events, 161 Federal Home Loan Mortgage Corporation usage. See Future fl ows (FHLMC) Earnings, handling, 65–66 qualifi cation, 22n Earnings before interest, taxes, depreciation, and underwriting standards, 38 amortization (EBITDA), 198 Federal Housing Authority (FHA). See 100% FHA Economies, securitization prepayment experience, 32n benefi ts, 275, 284–288 Federal National Mortgage Association (FNMA) summary, 288–290 qualifi cation, 22n impact, concerns, 291 underwriting standards, 38 summary, 302–303 Federal Reserve Effective convexity, 342 Board of Governors, U.S. Division of Banking Effective date, 105–106 Supervision and Regulation (caution), 294 Effective duration, 341 interest rates, reduction, 275–276 Embedded value. See Insurer Fee income, generation, 13. See also Servicing fee securitization, motivation, 205 Financial Accounting Standard Board (FASB), 19 Emerging market sovereign, 314 FIN 46R, usage, 179

iindex.inddndex.indd 355355 55/31/08/31/08 8:26:498:26:49 PMPM 356 INDEX

Financial Accounting Standard Board (Cont.) Ford Motor Company, securitization Interpretation 46 (Consolidation of Variable increase, 16 Interest Entities), 19–20 usage, 18 Financial covenants, usage, 200 Ford Motor Credit Co., 162 Financial entity, regulatory capital requirements Forward contracts, package, 103 (reduction), 18–19 Forward-start swap, 105–106 Financial futures fl ows, 192 Franchise loan servicers, 131–132 Financial guarantee, 92 collateral site inspections, 131 Financial guaranty insurance, 91–92 credit analysis skills, 132 Financial intermediaries management staff experience, 132 abilities, 283 operating statements, collection/analysis, 131 activity, 284 procedures, maintenance, 131 model, 292–293 third-party vendor engagement control, 132 necessity, 282 watchlist functions, maintenance, 131 originate-to-distribute, 295 Fraud risk, 144–145 role. See Fund-based fi nancial intermediary Free asset ratio, decline, 205 staffs, maintenance, 283 Fully ramped-up structures, 217 Financial intermediation, relationship. See Securiti- Fully supported conduits, variant, 171 zation Fund-based fi nancial intermediary, role, 284 Financial leases, usage, 162 Funded credit derivatives, 316 Financial leverage, increase (argument), 280–281 Funding costs, reduction, 13, 14–17 Financial markets, securitization Funding sources, diversifi cation ability, 13, 17 benefi ts, 275 Funds collection/investment, usage, 144 summary, 288–290 Future cash fl ows (FCFs), securitization, 187 impact, concerns, 291 summary, 206–208 summary, 302–303 Future fl ow deals Financial Stability Report of April 2007 (Bank of borrowing, possibility, 190–191 England), 295 features, 188–190 Financial supervisor, regulatory control, 292 types, 191–192 Firm valuation Future fl ows, 149–150. See also Financial futures asset securitization, impact (discussion), fl ows 278–279 borrower business, restrictions, 189 Modigliani/Miller position, 277–278 cash fl ow trapping, 188–189 First-loss risk, 320 contrast. See Assets capital, providing, 69n EATs, usage, 194–195 First National Bank of Keystone, residual interest off-balance sheet, absence, 190 (material differences), 301 origination independence, absence, 189–190 First-to-default example, 313 overcollateralization, extent, 189 Fixed physical settlement, 308 receivables, uncertainty, 188 Fixed rate payer, 101–102, 315 subordination structures, usage (failure), 193 fl oating rate interest, receiving, 106 third-party guarantees, presence, 195 Fixed rate receiver, 102 transferee, prioritization, 189 Fixed recovery swaps, usage, 320 Future fl ow securitization Floater coupon rate, calculation, 59 determination, 188 Floater interest rate cap, 58 reasons, 190–191 Floater/inverse combinations, creation risk, removal, 191 economic rationale, 56–57 Future fl ow securitizations, 8 example, 57 Future fl ow transactions, 150 Floater par value, calculation, 59 application, 190 Floating rate bonds classifi cation, 192 cash fl ows, 104t objectives, 191 classes, 55–59 structural features, 193 Floating rate interest, receiving. See Fixed rate payer Future revenues, 187 Floating rate payer, 315 securitization, 187–195 position, 105 summary, 206–208 Floating rate payment, determination, 107 Futures, counterparty risk, 103 Floating rate tranche, creation (possibility), 56 Floors, 115–118 GE Commercial Equipment Financing LLC, Series level. See Interest rate fl oor 2003-1 statement, 112 usage. See Securitization GECS Swap Agreement, 112

iindex.inddndex.indd 356356 55/31/08/31/08 8:26:498:26:49 PMPM Index 357

Generally accepted accounting principles (GAAP), 19 Insurance securitization, motivations, 205 General Motors Corp., 162 Insurer, embedded value, 205 Global Financial Stability Report (IMF), 265 Interest Alternative Mortgage Product accretion, usage, 51 (GSAMP) Trust 2006-S3, case study, 299–300 allocation, 52, 157. See also Credit card Moody’s discussion, 300 receivables Goods, export/sale basis, 192 calculation, 38 Government National Mortgage Association (GNMA) distribution, 39 qualifi cation, 22n rules, 54–55 underwriting standards, 38 measure, 340 Government-sponsored entities (GSEs) risk, measurement, 339–342 maintenance, 136 usage. See Bonds mortgage hedging activities, 292 Interest coverage (IC), 233–234 Granularity. See Collateralized debt obligations pool test, 260 loss. See Collateralized debt obligations triggers Greenspan, Alan (2005 credit derivatives state- compliance. See Overcollateralization ment), 224 concept, 257–258 Guardian Savings and Loan, failure, 141 Interest-paying bonds, dissection (motivation), 50–51 Hard credit enhancement, 88 Interest rate cap Hedge counterparty, rating, 268 commonness, 56 Hedge funds, 315 specifi cation, 116 Herfi ndahl Index, 256 usage, 118. See also Mortgage-backed securities; High-spread contracts, 88 Net interest transactions High-yield bonds (junk bonds), 14 Interest rate derivatives acquisition, 216 instruments, 103–105 High-yield corporate bonds, focus, 262 proceeds, usage. See Waterfall High-yield corporate CDOs, Moody focus, 262 usage. See Securitization transactions High-yield corporate debt, usage, 243 Interest rate fl oor, level, 58 High-yield transactions, spread compression risk Interest rate paths (impact), 268 bond class, calculation. See Sce- Hire purchase funding, usage, 162 nario interest rate path Historical mortality table, usage. See Credit dependence, 329 enhancement generation, 331 Hot backup servicer, 142 procedure, 330 Hybrid CDO, 215 simulation, 330–334 Hybrid conduits, 172 Interest rate risk, 326. See also Assets Hybrid fi nance, 195 mitigation, 111–112 Hybrid rate, 112 necessity, 9 specifi cation, 24 IAS 39, usage, 240–241 Interest rates Income coverage tests, 257–260 basis mismatch, relationship, 267–268 Index, 314 benchmark term structure, 330 Index-based credit trades, 313–314 changes. See Ramp-up period Index tracking CDOs, 251–252 corridor, 117 Index trades, 251–252 usage, 118 pool construction, 314 cycles, prepayment rates (relationship), 32n Industry clusters, defi nition, 256 decrease, protection, 116–117 In-force life insurance policies random paths, 331 surplus, monetization, 205 Interest rate swaps, 101–115. See also Counter- value, 204–205 parties Infrastructure facilities, construction, 150 OTC instruments, 103 Installment credit, forms, 162 International Monetary Fund (IMF). See Global Installment period, length, 7 Financial Stability Report Installment sales contracts, usage. See Chief International Swap and Derivatives Association fi nancial offi cer (ISDA) documentation, 307–308, 317 Insurance profi ts, 187 Intra-obligor correlation, absence, 218 securitization, 204–206 Inverse fl oating rate tranche (inverse fl oater) summary, 206–208 availability, 58n transaction structure, 206 coupon rate, 56

iindex.inddndex.indd 357357 55/31/08/31/08 8:26:498:26:49 PMPM 358 INDEX

Inverse fl oating rate tranche (Cont.) improvement, 284 coupon reset formula, 58 provider, rating, 178 decline, 57 risk, 268 interest, calculation, 59 reduction, 287–288 interest rate cap, calculation, 59 Liquidity support, 177–178 par value, calculation, 59 amount/sources, determination, 77–78 usage, 56 basis. See Conduits Investment-grade assets, acquisition, 216 necessity, understanding, 170–171 Investment-grade certifi cate holders, cash fl ow Loans interruptions, 133 amortization, 163 Investment-grade-rated notes, rating triggers characteristics, projections, 332 (inclusion), 118–119 origination, 296 Investment objectives, satisfaction, 279 pool Investor par value, excess, 66–67 communications, usage, 144 simulated cash fl ows, 334t credit risk, cushion, 189 portfolios, direct creation, 315 Issuers, market establishment, 17 records, establishment, 127 Issuer trust, representation, 157 servicing, 8 iTraxx, corporate/noncorporate name index, 251 Loan-to-value (LTV) ratio, 70 impact, 163 Junior bonds, 306 Lockout period, 69 Junior notes (subordinated notes), 10 addition. See Accrual bonds Junior tranches, 312 Lognormal probability distribution curve, usage, 97 Junk bonds. See High-yield bonds London Interbank Offered Rate (LIBOR), 102 cash infl ow, 105 KeyCorp Student Loan Trust 2003-A, Asset-Backed curve, usage, 330–331 Notes transaction (prospectus), 110–111 decline, 58 Key man provision, usage. See Collateralized debt fl atness, 107 obligations payment, 109–110 reference rate, 322 six-month LIBOR, 103 Lattice model, usage, 329. See also Corporate bonds payment, 104 Legal arbitrage, 16 three-month LIBOR, 110–111 Legal entity, creation, 14 Longer-term assets, loan/bond form, 5–6 Legal risk, 72 Long-Term Capital Management (LTCM), col- inclusion, 123 lapse, 225 Lender, amount (advancing), 5–6 Loss allocation rules, 22 Lenders, credit risk slice, 7 Loss computation, 319–320 Letters of credit (LOCs), 91, 93 making. See Protection seller Leverage Loss materiality provisions, 320 risk implication, 217 Loss rate, periodical fl uctuations, 159 usage. See Risk Loss scenario, 95 Leveraged buyout (LBO), impact, 195 consideration, 80 Liabilities Lowest-rated bond class, sale, 73 bullet repayment, providing, 76n Low-spread contracts, 88 classes LTV Steel Company, Inc. assumption, 248 bankruptcy challenge, 16–17 issuance, 231 securitizations, true sale status, 16 sequential pay-down structure, 76 interest rates, 267–268 tranching, 4 Market-value-based structures, relationship. See Life insurance business Par value insurer cash infl ows, 204 Market value CDOs, 258–259 insurer cash outfl ows, 204 Mark-to-market losses, 322 Liquidity Mark-to-market value. See Swaps amount, determination, 78 Master servicer, 124–125. See also Residential enhancements, sources, 78. See also Banks mortgage servicers facility, 67 Master trust, 156–157 creation, 178 structure, 156–157. See also Credit card usage, 200 receivables Materiality loss provision, 320

iindex.inddndex.indd 358358 55/31/08/31/08 8:26:498:26:49 PMPM Index 359

Maturity intermediation, 283 Net Trust Swap Payment, 110–111 Maturity matching, presence, 173 Net Trust Swap Receipt, 111 Maximum WAC, 256 New Century, bankruptcy fi ling, 301n Metropolitan Life Ins. Co. v. Bank One, N.A., 145 Nominal spread, 327 Mexican originator transaction, example, 191–192 Nonagency ABS, discussion, 56 Mezzanine tranches, 312 Nonagency CMOs Minimum WAC, 256 discussion, 56 Mismatches. See Connected mismatches qualifi cation, 31n relationship. See Interest rates Nonagency deals, structuring, 65 Modigliani/Miller position. See Firm valuation summary, 80–84 Monetary policy Nonconforming servicers, welcome calls, 137 effectives, reduction, 291–292 Nongeneric interest rate swaps, usage. See Secu- securitization, impact, 292 ritization Monoline insurance, 91–93 Non-ISDA document, usage, 318 Monte Carlo simulation, usage, 328–339 Nonpayment, reasons, 7n Monte Carlo simulation model, 328–329, 341 Nonrecourse factoring, 7 usage, 336–337 Notional amount, 101–102 simplicity, 330 decline. See Amortizing swap Monthly cash fl ow. See Pass-through certifi cates liability principal, connection, 111 165% PSA assumption, 40t–42t stasis. See Amortizing swap Monthly excess cash fl ow, application, 114 Notional interest-only (notional IO) bond classes, Monthly principal, cash fl ow dependence, 39–40 60–61 Monthly spot rates, simulated paths, 336t investors, 61 Moody’s, diversity score table, 257t Notional pool, risk attributes, 248 Moody’s Perspective 1987-2002: Securitization Notional principal, 101–102 and its Effect on the Credit Strength of Com- Notional value, 318 panies (Moody’s), 280 Mortality table, 94 Obligors Mortgage-backed pools, 152 concentration, 182 Mortgage-backed products, appeal (broadening), 288 credity quality, consideration, 85 Mortgage-backed securities (MBSs) default incentives, 85 cash fl ow, 326 failure, 92 yield measure, 327 notifi cation, requirement, 238n classifi cation, 152 Off-balance fi nancing, achievement, 13 interest rate cap, usage, 118 Off-balance sheet prepayments, 329 absence. See Future fl ows valuation, 325 transaction, usage, 19 Mortgage banker, impact, 285 treatment. See Securitized assets Mortgage interest rates, changes, 287 sale treatment basis, 241 Mortgage lending, curbing (legislative initiatives). Off-balance sheet fi nancing See Predatory mortgage lending achievement, 19–20 Mortgage market, operation, 285–286 disclosure, 20 Mortgage pool, cash fl ow projection, 32n SOX requirements, 20 Mortgage-related asset-backed securities, 152 Offshoring transactional-based activities, 126 Multiple leverage (coupon leverage), 58 Off-the-run Treasury issues, usage, 330–331 Multiple-seller ABCP conduits, 171 One-factor interest rate model, 331 Multipliers, usage. See Standard & Poor’s 100% FHA, 32n Multiseller conduits One-month future interest rates, simulated paths, 333t assets, example, 174 Onerous asset, 141 structure, 172f On-the-run Treasury issues, price/yield, 330–331 Opaqueness, increases. See Bank risk National Century Financial Enterprises (NCFE), Operating leases, usage, 162 144–145 Operating revenues, 187 Negative carry, 88–89 securitization, 195–204 risk, 268 methodology, 196–198 Net interest margin (NIM) transactions, interest summary, 206–208 rate cap (usage), 118 Operational risk. See Securitization transactions Net operating income (NOI) adjustments, 133 Basel II defi nition, 123 Net present value analysis, ability. See Residential structured fi nance market perspective, S&P mortgage servicers survey, 123–124

iindex.inddndex.indd 359359 55/31/08/31/08 8:26:508:26:50 PMPM 360 INDEX

Option-adjusted basis, analysis, 49 statement, 117–118 Option-adjusted duration, 341 Partially supported multiseller ABCP program Option-adjusted spread (OAS), 325, 337–338 structure, 175f analysis, usage, 328–339 Par value calculation, 337 market-value-based structures, relationship, 217 usage, 338 sum. See Performing assets Option cost, 338–339 Pass-through certifi cates (benefi cial interest certifi - equation, 338 cates), 10 Option-free bonds, assumptions, 340–341 monthly cash fl ow, 36t–37t Options, strip, 116 Pass-through securitizations, structured fi nance Originate-to-distribute, basis, 295 (contrast), 4–5 Origination process, spread (capture), 17–18 Pass-through security Originator coupon rate, 35 accounting (volatility removal), synthetic trans- form, 287 actions (usage), 241 prepayment speed (100% PSA), 46 balance sheets, mortgages (impact), 275–276 Pass-through security, creation, 286–287 early amortization, impact, 194–195 Pay-down structure liabilities, repair (proposal), 298 selection. See Bond classes loan repayment, 198 types, 76 performance risk, 189 Payment processing. See Servicers rating, arbitrage, 190 Pay option adjustable-rate mortgage, ability, 275n reference, 8 Pay-through certifi cates, 10 Originator-provided credit enhancements, 86–90 Performing assets Originator-retained collection/servicing, 6n par value, sum, 259 Originator/seller principal amount, 258 credit rating, 14–15 Per-loan servicing costs, reduction, 126 excess spread, withdrawal, 66 Physical settlement, 308, 320–321. See also Fixed reference, 9 physical settlement Outstanding investments, proportions, 158 commonness, 321 Overcollateralization (OC), 66–67, 89–90, 118 Plain secured borrowing, whole business securiti- amount. See Targeted overcollateralization zation (contrast), 196 amount Plain vanilla swap, notional principal (stasis), 108 reduction, 115 Planned amortization class (PAC) bonds, 43–49, 329 building, 113, 114 average life, 48 consideration, 155 comparison. See Bond classes extent. See Future fl ows inclusion, 79 maintenance, 193 priority, 45–46 OC/IC triggers, compliance, 233 total par value, 48 test, 258–260 Planned amortization class (PAC) structure. See illustration, 259 Sequential pay PAC structures triggers, concept, 257–258 distribution rules, understanding, 46–47 usage. See Credit enhancement introduction, 45n Over-the-counter (OTC) deals, contrast. See Planned amortization class (PAC) support struc- Capital market ture, 49 Over-the-counter (OTC) instruments. See Interest Planned redemption obligation (PRO) bonds, 45n rate swaps inclusion. See Oxford Acceptance Corporation Over-the-counter (OTC) transactions, 307–308 III Series C CMOs Oxford Acceptance Corporation III Series C Pollock, Alex (2007 statement), 297 CMOs, PRO bonds (inclusion), 45n Pool diversity score, computation, 232 Pacifi c Thrift and Loan, residual interest (material granularity. See Collateralized debt obligations differences), 301 pool Parallel shift assumption, 340 insurance, 93 Parent bond policies, 93 class, 57 interests, sale, 175 parameters, 59 paper (coverage), program-wide enhancement coupon rate, 51 (usage), 176 Pari passu bonds, 306 quality, measures, 255–257 Park Place Securities, Inc., Asset-Backed Pass Pool level enhancement, 175, 176 Through Certifi cates, Series 2004-WCW2 usage. See Assets

iindex.inddndex.indd 360360 55/31/08/31/08 8:26:508:26:50 PMPM Index 361

Pool level triggers, components, 177 Project fi nance, 7 Portfolio. See Dynamic portfolio; Static portfolio inclusion, 4 assets, deterioration, 177 Properties default swap, 311 geographical diversifi cation, 69 derivative, 311–312 types, 70 trade. See Structured portfolio trade Proportional pay-down structure, 77 triage, demonstration. See Residential mortgage Pro rata pay-down structure, 77 servicers Protection buyer, 307, 314–315 yield, 159 physical delivery, 321 Postacceleration waterfall, 201 Protection payment, 214, 308 Postenforcement waterfall, 201 Protection purchase, 315 Predatory mortgage lending, curbing (legislative reason, 309–310 initiatives), 298 Protection seller, 307, 315 Preenforcement waterfall, 201 loss computation, making, 319–320 Premium, 214 premium, earning (example), 310 consideration, 318 Public debt market, absence, 281–282 inconstancy, 318 problems, 282 protection buyer purchase, 308 Public Securities Association (PSA) Prepayment-protected bond classes, 79 approach, mutual exclusivity, 33n Prepayments, 31–38 benchmark (prepayment model), 34 allocation. See Credit card receivables prepayment benchmark, 32–38 benchmark. See Public Securities Association range, 50 concern, 31–32 speeds, 34 conventions, 31–34 Purchase rate, 161 defi nition, 31 experience. See Federal Housing Authority Ramp-up period. See Arbitrage synthetic CDOs; impact, 87n. See also Debt holder Collateralized debt obligations model. See Public Securities Association concentration risk, 269 problems, 32 interest rate changes, 269 projection, 332 Ramp-up risks, 268–269 protection, necessity (determination), 78–79 impact. See Arbitrage rate. See Conditional prepayment rate Rating agency, impact, 73 relationship. See Interest rates Rating arbitrage risk (elimination failure), CMO creation argument, 281 (impact), 288 occurrence, 281 speed, 50 Rating factors, 256–257. See also Weighted aver- assumption, 39 age rating factor Present value, calculation. See Scenario interest Rating triggers rate path decrease, 119 Primary fee, seniority, 264 inclusion. See Investment-grade-rated notes Primary servicer, 124. See also Commercial mort- Real estate investment trusts (REITs), 216 gage-backed fi nance servicers; Residential Real estate owned (REO) mortgage servicers dispositions, procedures, 135 Prime borrowers, deals (distinction), 22 management experience, 139 Prime loans, 21–22 overseeing/disposal, 134 Principal property management marketing/disposition allocation. See Credit card receivables procedures, 137 calculation, 38–39 status, 135 cash fl ow dependence. See Monthly principal Real Estate Settlement Procedures Act (RESPA) distribution, 39 guidelines, 136 rules, 43, 55 Receivables payments, 48 eligibility criteria. See Asset-backed commercial allocation, 58 paper conduits disbursal, 52 sale, 188–189 priority, 49 transfer, absence, 239 Principal and interest (P&I) advances, 133 uncertainty. See Future fl ows Proceeds, usage, 112–115. See also Waterfall Reference asset, 307, 311–312 Program level enhancement, 175, 176 Reference entity, 214, 307 Program sponsor. See Asset-backed commercial paper cheapest-to-deliver asset, delivery, 317 Program-wide triggers, components, 177 Reference obligation, 307

iindex.inddndex.indd 361361 55/31/08/31/08 8:26:508:26:50 PMPM 362 INDEX

Reference portfolio, 307, 311–312 primary servicers, 135–137 Reference rates, 322 prime-time calling percentage, 138 excess, 116 short-term repayment plan cure rates, 138 usage, 102 skip-tracing abilities, demonstration, 139 Refi nancing rates, 332 special servicers, 138–139 simulated paths, 333t subprime services, 137–138 Regulation AB. See Securities and Exchange Com- collection training, 137 mission subservicer delinquency reporting/collection Regulatory capital activity, review, 140 arbitrage, 69 success rates, 138 management, 18–19 telephony, usage, 138 relief, 69 time-to-call criteria, 138 requirements, reduction. See Financial entity vendor management methodologies, 138 Reinvesting type CDO, presence, 219 vendor relationships, demonstration, 136 Reinvestment period. See Arbitrage cash CDOs Residual interest, value (material differences), 301 Reinvestment risks, 326. See also Revolving period Residual interest bond class, 56n Related-party guarantees, 91 Residual profi ts, double taxation (avoidance), 240 REMIC rules, 132 Residual value, representation, 195–196 consistency, 135 Restrictive covenants, usage, 200 Repo/TRS conduit, fi nancing, 172 Restructuring, 318 Representation, Davidson update, 297–298 Retail assets, whole sale assets (contrast), 151 Resecuritization CDOs, 249–251 Retail loans, 149 Resecuritizations (CDO2 // CDO squared), 216 pool, 95 Reset date, 105–106 summary, 165–167 comparison, 116–117 Retail pools Residential mortgage-backed securities (RMBSs) assumption. See Collateralized debt obligations loans, 69 wholesale loan pools, contrast, 152–153 retail loan pool support, 212 Returns, volatility, 69 transactions, 152 Return swaps, total rate, 316–317 migration. See Collateralized mortgage implication, 322 obligations Revenues, future fl ows securitization, 188 Residential mortgage debt, debt market size, 286 Revolving asset securitization, 156 Residential mortgage loans Revolving asset structure, 155–156 investment vehicle problems, 286 Revolving period, reinvestment risks, 269 sale, 17–18 Revolving structure, 69 support. See Securitization Risk underwriting standards, satisfaction, 22 buyer, 307 Residential mortgage markets, funds supply capital, inadequacy. See Banks (dependence), 285 creation, leverage (usage), 220 Residential mortgage servicers, 135–141 distribution, 199 best-exit-strategy-workout plan, 138 identifi cation, 70–72 collection calling hours, expansion, 138 necessity, 67–68 collection technology, maintenance, 136–137 seller, 307 dual-path strategy, 139 transfer, impact, 293 FDCPA instruction, 137 Risk-based capital guidelines, concept, 18–19 FDCPA training, 136 Risk-based capital requirements foreclosure management, securitization (usage), 18 dual track maintenance, 138 satisfaction, 13 proactive timeline management, 139 Risk transfer-based transactions, 151 foreclosure/bankruptcy timelines, management, Risk-weighted assets, 69 138 Risk-weighted value, 18 insurance loss drafts/claims disbursements, maintenance, 140 Sale treatment, basis. See Off-balance sheet later reporting/remitting penalties, monitoring, 140 Sarbanes-Oxley Act of 2002 (SOX) Section loss mitigation, dual track maintenance, 138 401(a), impact, 20 master servicers, 140–141 Savings and loan associations (S&Ls), residential net present value analysis, ability, 137 mortgage loans (percentage), 285 payment processing environment, demonstra- Scenario interest rate path, bond class (present tion, 136 value calculation), 334–336 portfolio triage, demonstration, 139 Secondary fee, payment, 264

iindex.inddndex.indd 362362 55/31/08/31/08 8:26:508:26:50 PMPM Index 363

Second-lien mortgages, collateral, 299 usage. See Risk-based capital requirements Second-to-default obligor, protection purchase, 313 whole business securitization, contrast, 197t Secured lending, 5 Securitization transactions, 92 Secured loans interest rate derivatives, usage, 101 structure. See Whole business securitization summary, 120–122 usage, 162 operation, trustee role, 143–144 Securities operational risk, 123 arbitrage, 172 perspective, 65–66 credit quality, 6 result, 190–191 third-party guarantor, achivement, 6n Securitized assets, off-balance-sheet treatment, 150 design problems, 294–300 Seller issuance. See Securitization cross-default, 177 repayment, self-liquidating , 187–188 insolvency/bankruptcy, 177 Securities and Exchange Commission (SEC), 19 interest, 156. See also Credit card receivables Regulation AB, 142–143 representations, 195 defi nition. See Servicing function term, usage, 116 Securities Industry Financial Markets Association warranties, 195 (SIFMA) Seller level enhancement, 175 ABS market estimates, 162 Senior bonds estimates. See Credit card ABS class Securitization. See Future fl ow securitization; Term issuance, 73 securitization protection, increase, 76–77 advantages, BIS recognition, 291–292 dissection, 23 assets, sale (involvement), 6–7 Senior notes, 10 benefi ts, 275. See also Economies; Financial Senior secured debt, 90–91 markets Senior-subordinate structure, 90–91 summary, 288–290 Senior tranches, 312 capital structure, equity cost, 74 risk, 218n caps, usage, 117–118 Sequential pay PAC structures, 47–49 contribution. See U.S. housing fi nance market Sequential pay structures, 38–43 defi ning, 5–8 Series trust, representation, 157 defi nition, refi nement, 4 Servicer risk, 72 economic impact, 275 Servicers. See Backup servicer; Commercial fi nance Economist comments, 277 servicers; Franchise loan servicers; Master fi nancial intermediation, relationship, 281–284 servicer; Primary servicer; Specialized servicer; fi nancing, contrast, 6 Special servicers fl oors, usage, 117–118 advances, liquidity enhancement source, 78 funding advances, requirement, 128 costs, 277–281 asset-aging analysis, usage, 128 usage, reasons, 13–21 collection staff, oversight ability, 129 illustration, 8–10 compliances, 128 interest rate swaps, usage, 108–112 consumer fi nance abilities, 129–130 investor protection, 16 customer service environment, quality, 129 issuance, cost, 68 data scrubbing, ability, 130 legal/accounting expenses, factoring, 15–16 delinquency minimization, 128 legal preference, 16 delinquent portfolios, management, 129 markets, establishment, 296 document tracking, 128 nongeneric interest rate swaps, usage, 108 employee turnover, stability measure, 126 nonquantifi able benefi ts, 17 FDCPA training/compliance monitoring, 130 operational issues, 123 insolvency/bankruptcy, 177 summary, 145–146 insurance, presence, 128 origins, 285 internal controls, 127 relationship. See Asset-backed commercial paper investor reporting, 128 residential mortgage loans, support, 113–115 loan/asset administration, 127–128 risk management capability, 18 obligor service, 128 securities, issuance, 10 organizational structure, 125–126 structure, consideration, 66 payment plan procedures, presence, 129 structuring, 72–73 payment processing, 128 summary, 11–12 pricing model/technology, postpurchased review, technique, 3 130

iindex.inddndex.indd 363363 55/31/08/31/08 8:26:508:26:50 PMPM 364 INDEX

Servicers (Cont.) Special purpose entity (SPE), 8–9 qualities, S&P identifi cation, 128–141 qualifi cation, 19n recovery models, development/implementation Special purpose vehicle (SPV), 5 (demonstration), 130 agency collections, transfer, 238 reporting, 142–143 assets, 66 staff transfer, 155–156 strengths, 125 conduit, comparison, 170 turnover, 126 creation, 230 strengths, 125–128 exposure, 101 systems, 127 importance, 8–9 interface, 130 interposing, 311 training, 126 loans, near-homogeneous portfolio (transfer), 229 types, 124–125 management, absence, 67–68 Services, export/sale basis, 192 payments, 192 Servicing purchase, example, 89 business continuity planning, 127 securities, issuance, 113n disaster recovery, 127 setup fee, 160 example, 9 organizations, organizational structure (opti- purpose, defeat, 9 mum), 126 Special servicers. See Commercial mortgage- process-oriented job, 125 backed fi nance servicers; Residential mortgage transition, 141 servicers Servicing fee, 34 abilities. See Delinquent consumer fi nance income, generation, 20–21 transactions Servicing function, 124 demonstration, 129–130 SEC Regulation AB defi nition, 124 Speculative-grade-rated corporations, bank loan Setting date, 105–106 replacements, 3 Settlement frequency, 107 Speculative-grade rating, 14 Shorter bonds, offering, 54 Spread compression risk, 268 Shorter-term paper, usage, 43 impact. See High-yield transactions Short squeeze, 321 Stabilized mortgage reduction term (SMRT) Short-term assets bonds, 45n credit card securitization fi nancing, 169 Standard & Poor’s usage, 5 cumulative loss, projection, 300n Short-term bond classes, par value, 24 multipliers, usage, 95–96 Short-term fi nancing, necessity, 77–78 State of Arizona et al. v. Credit Suisse First Boston Short-term interest rate Corporation, et al., 145 factor, 331 Static pools, presence. See Collateralized debt mean-reversion speed, 331 obligations Short-term investments, presence, 258 Static portfolio, 312 Short-term liquidity, problem, 66 Static spread, 328 Short yield volatility, 331 Steel, Robert (2008 American Securitization Simulated average life, 339 speech), 276–277 Simulated future one-month rates, interest rate Step-down triggers, 67 path, 335 Step-up feature, usage, 318 Single-B issuers, spread, 14 Step-up pay-down structure, 77 Single-monthly mortality (SMM) rate, 33–35 Sterling-denominated swaps, actual/365 day count Single-name credit derivatives, fl exibility, 313–314 (usage), 106 Single-name default swap, 311 Stop-issuance triggers, 176–177 Single-name derivative, 311–312 Strike rate, term (usage), 116 Single-obligor derivative, 311–312 Structural arbitrage Single-seller ABCP conduits, 171 arguments, 279–280 Skip-tracing abilities, demonstration. See Residen- principle, 279–280 tial mortgage servicers Structural credit enhancement, 86, 90–91 Small and Medium-sized Enterprise (SME) loans, Structural protection triggers, inclusion, 79–80 130, 314 Structured Asset Investment Loan Trust Mortgage Soft credit enhancement, 87–88 Pass-Through Certifi cates, Series 2005-4 (pay- Sovereign-related EATs, 194 ment priority), 113–114 Sovereign risks, 191–192 Structured CDOs, growth, 251 Specialized servicer, 125 Structured credits, inclusion, 4

iindex.inddndex.indd 364364 55/31/08/31/08 8:26:518:26:51 PMPM Index 365

Structured credit trade, 312 mark-to-market value, 119–120 Structured credit trading, concept, 306 notional principal Structured fi nance decline. See Amortizing swap BIS defi nition, 4–5 stasis. See Plain vanilla swap capital market participant defi nition, 4 payments, negative cash fl ow impact, 113n Structured fi nance CDOs, 249–251 position, interpretation, 103–105 assets, 250–251 quoting convention, 106–107 genesis, 249–250 trade date, 105–106 growth, 250 trustee termination, absence, 119–120 popularity, 216–217 Synthetic CDOs, 234–243 problems. See Subprime crisis accounting volatility, absence, 240–241 Structured investment vehicle (SIV), 173 advantages, 236 Structured notes, inclusion, 4 asset acquisition, 214 Structured portfolio trade, 312–321 book size reduction, absence, 242 Structured product CDOs, 249 bullet repaying notes, usage, 242–243 Structured vehicles, 169 cash CDOs, contrast, 236–243 summary, 182–185 contrast. See Cash CDO Structure risk, exposure, 270 creation, 234–236 Structuring customer service fl exibility, retention, 242 bands, 46 FAS/IAS standards, usage, 241 goals, 13 fl owchart. See Balance sheet synthetic CDO summary, 24–27 funding/reinvestment problems, minimization, speeds, 46 236 Subordinated bond funding/risk transfers, split, 236 classes, subordinated claims, 91 future profi ts, sources, 241 excess interest, 241 issuance size, 225–226 Subordinated fi rst-loss liabilities, 66–67 legal costs, reduction, 239 Subordinated loan, 88 origination/servicing function separation, nonre- Subordinated notes. See Junior notes quirement, 238–239 Subordination structures, usage, 22 residual profi ts, double taxation (avoidance), 240 failure. See Future fl ows transfer, validity (guarantee), 127 Subprime borrowers, 21–22 true sale deals, distinctions, 22 concerns, 238 Subprime crisis problems, alleviation, 236–238 aftermath, 225 up-front taxation, absence, 239–240 response, 296–297 Synthetic securitization, 151 structured fi nance CDOs, problems, 250 Synthetic structures, 150–151 Subprime lending, securitization (responsibility), Synthetic technology, usage. See Collateralized 296–297 debt obligations Subprime loans, 21–22 Synthetic transactions, usage. See Originator securitization, 22–23 Synthetic transfers, 315 Subprime mortgage bonds, ISDA publication, 317–318 Targeted amortization class (TAC) bonds, 50 Subprime services. See Residential mortgage servicers Targeted overcollateralization amount, 114 Superior Bank Tax/insurance third-party service providers, usage, residual interest, material differences, 301 126 Tier 1 capital, fi rst-loss support, 301 Tax risk, 72 Support bonds, 43, 46–49 10-K report, usage, 142–143 contraction risk, acceptance, 46 Tenure, 319. See also Credit derivatives inclusion, 79 Term securitization, 173 types, 49 Theoretical value, determination. See Bond classes Surety bonds, 92 Third-party credit enhancement, 86, 91–93 Surplus excess spread, utilization (providing), 157 Third-party credit risk, 91 Survival rate, 94 Third-party property managers, maintenance. See Swaps. See Interest rate swaps Commercial mortgage-backed fi nance servicers administrator, impact, 114–115 Third-party-related EATs, 194 documents, 119–120 Third-party vendor engagement control. See Fran- market chise loan servicers quotes, 105–107 Threshold risk, 320 terminology/conventions, 105–107 Time tranching. See Bond classes

iindex.inddndex.indd 365365 55/31/08/31/08 8:26:518:26:51 PMPM 366 INDEX

To-be-ramped up structures, 217 Valuation methods Total assets, excess, 157 applicability, 320 Total capital reserves, fi nancial entity requirement, Monte Carlo simulation, usage, 328–339 18–19 OAS analysis, usage, 328–339 Total principal payment, 35 Value of In-force (VIF) policies, 205 100% PSA/250% PSA, 44t–45t Variable interest entities, 19–20 Total rate of return swap. See Return swaps -reduction method, 332n (TRS), 322 Vehicle fi nancings proposals, dealer origination, 163 Towers Healthcare, Ponzi-type devices, 144–145 Very accurately dated maturity (VADM) Toyota Auto Receivables 2003-B Owner Trust, bond class, 54 Class A-3 statement, 108–109 example, 54–55 Trade date. See Swaps Tranche payment, 55 Warm backup servicer, 142 Tranching Warranties, Davidson update, 297–298 concept, 231–232, 306 Waterfall indexes, combination, 306 deviation. See Distribution waterfall Transactions interest rate derivatives, proceeds (usage), 113 deleveraging, 257–258 stipulations, 199 economics, 78 Weighted average coupon (WAC), 34–35. See also evaluation, 120 Maximum WAC; Minimum WAC microlevel structuring, 21 Weighted average maturity (WAM), 34–35 structure Weighted average rating factor (WARF), 255–256 economic goal, 23–24 Whole business securitization, 195–204 example, 74–75 asset value, realization, 203 structuring, implications, 14–15 attributes, 203–204 transparency, absence, 20 bankruptcy protection, 198–199 types, 152 bankruptcy remote design, absence, 198–199 Triple-B rated investment defaulting, historical basis, reasons, 198 probability, 85–86 brand value, 203 Troubled loans, overseeing/disposal, 134 businesses True sale features, 202 achievement, 164–165 usage, 202–204 importance, 9 cash fl ow waterfall, usage, 200–202 legal issue, 17n concept, 202–203 opinions, 189 contrast. See Plain secured borrowing; Securi- problems, alleviation. See Synthetic CDOs tization risk, 315 credit enhancements, 199–200 structure entry barriers, 203 basis. See Cash securitization future profi ts, maintenance, 203 usage, 230–231 management, 204 Trust deed, usage, 143 methodology, 196–198 Trustees operational constraints, stress, 199 legal role, 143 presence, demonstration, 203 role. See Securitization transactions secured loan structure, 196, 198 technology assistance, 144 structural enhancements, 199–200 Trust-preferred CDOs, 217 usage, 199–200 Two-bond class structure, creation, 73–74 UK development, 195 Whole sale assets, contrast. See Retail assets Underwriting standards, 8 Wind down triggers, 176–177 case study, 299–300 Working capital facilities, usage, 200 differentiation, Moody’s proposals, 297 problems, 294–300 Yield curve Unfunded credit derivatives, 316 impact, 60 Uniform Commercial Code (UCC) refi lings, 133 parallel shifts, 340 Uniform Single Attestation Program, maintenance, Yield maintenance agreement, 118 136 Yield measures, problems, 326 United Kingdom (UK) bankruptcy law, 152 Up-front taxation, absence. See Synthetic CDOs Zero-volatility spread (Z-spread), 325, 327–328 U.S. housing fi nance market, securitization contri- measure, 328 bution, 285–288 OAS, relationship, 338

iindex.inddndex.indd 366366 55/31/08/31/08 8:26:518:26:51 PMPM