Topic 6 - Securitisation Flashcards
Originator
Bank/lender who creates loan
Issuer
Special purpose entity to issues the securities (SIV/SPV)
Servicer
Collects payments on securitised loans
Advantages of Securitisation
- Diversifies credit risk exposire
- Liquifies assets
- New sources of capital
- Geographical diversification
- Bank can better manage interest rate risk/duration gap
- Generates fee income
- May be able to take assets off balance sheet
GNMA
Guarantor of timing insurance
FNMA
Creates MBS by purchasing loan packages
WAL =
WAL = [Time × Expected Principal received]/Total Principal Outstanding
Fair price on a pass-through
P(GNMA) = P(T-BOND) - P(PREPAYMENT OPTION)
CMO
Series of pass-through securities, sorted into tranches
Z-Class CMO
Like a zero coupon bond, no interest paid until other classes have been paid
R Class
No interest until other classes have been retired
MBB
Mortgage Backed Bond - issued by FI’s who have a block of mortgages as collateral against the bonds
Problems with Securitisation
- May not reduce capital requirements
- Prepayment risk
- May increase competition for loans/deposits
- Underlying loans can go bad and cause further issues
- Cost of insurance/guarantees
- Cost of overcollateralisation
- Costs of valuation/packaging
Regulator Concerns
Risks:
- Having to quickly make money to pay investors
- Agreeing to serve as underwriter for securities that can’t be sold
- Acting as a credit enhancer
- Underestimating need for loan reserves
- Unqualified trustees may fail to protect investors
- Impacts securitisation may have on other loans
