... 1PT10MBA64 INTRODUCTION: Securitization is the process of pooling and packaging Financial Assets, usually Relatively illiquid, into liquid marketable securities. Securitization allows an entity to Assign (i.e. sell) its interest in a pool of financial assets (and the underlying security) to other entities. Securitization in India: While there has been a lot of discussion about the potential of securitization in India, Actual deal activity has not kept pace. While some early adopters like ICICI, TELCO and Citibank have been actively pursuing securitization, almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals. Literature Review: Mr. Manoj Dengla from ICICI Structured Products Group whose valuable insights have been considered for the paper. Mr. Pranay Agrawal and Mr. V. Srikanth of Fractal Technologies Ltd. for narrating their securitization experience. 1. According to reports, the power sector in India needs a funding of about USD 17 billion over the next 10 years 1. 2.A revocable trust (SPV) purchases assets from the Originator and issues Pay Through Certificates to investors. 3. The deal size was Rs. 10.35 billion comprising 11,106 individual housing loans HDFC and LIC Housing Finance Ltd. 4. An ABCP conduit issues commercial paper to finance the purchase of assets ranging from credit card, auto and trade receivables to CBO and CLOs. Objectives: This paper...
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...that are secured by cash flows from different kinds of assets. The issued securities are called Asset-Backed Securities (ABS). In essence a pool of payment claims are packaged and are made to securities in order to create a secondary market for the underlying receivables or other various illiquid assets. Securitisation 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 said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS). Therefore, securitization of real estate is the pooling of real estate assets as underlying assets securing a debt, which is issued to investors in return for cash flows from the underlying real estate assets. The illiquid real estate assets that generate a constant cash flow are formed into a tradable security and are floated on the debt market. Securitization process In its most basic form, the process involves two steps. 1. A company with loans or other income-producing assets—the originator—identifies the assets it wants to remove from its balance sheet and pools them...
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...liquid assets and then expressing this as a percentage of its total assets” (Gup et al., 2007, p.356). It only considers asset liquidity, and this measure is only one point in time. However, dynamic approach compares projected liquidity needs with projected available liquidity (from both asset and liability sources) for each time period. “This approach is superior to focusing on one or the other parts of the liquidity problem because it evaluates liquidity relative to bank needs” (Gup et al., 2007, p.356). APRA is proposing that banks in Australia hold more liquidity in the event of future crisis. The reason for this is “APRA noted that the financial crisis exposed the limitations of existing liquidity reporting rules when markets are under severe stress” (Baltazar, 2009, para.8). APRA (2009) said the financial crisis has highlighted the need for ADIs to have adequate levels of liquidity and robust liquidity risk management systems, and has provided considerable insights into better practice in this area. APRA supports the Basel Committee’s measures and agrees that greater international consistency in prudential regulation, promoted by the Leaders of the G20, will strengthen Australia’s prudential framework. Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. It is an important source of liquidity for banks. A typical example of securitization is a mortgage backed security (MBS)...
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...According to Forbes, collateralized debt obligations are “investment-grade security backed by a pool of various other securities that can be made up of any type of debt, in the form of bonds or loans”. This process of “pooling in debt to reduce risk and raise returns” is known as collateralized debt obligation. The process of splitting the debt into different tranches to assign the payment priority and interest rate is known as securitization. Investment banks can buy mortgages and assign them to certain entities. They can now sell shares of these mortgages at a certain share price and yield rate. There will always be different investors; there are those who are risk averse and find the shares to be too risky, and those who can afford the higher risk and find the yield to be too low. To accommodate both ends, these shares are sliced into different classes also known as tranches. Since mortgage backed securities all paid the same amount, the class will determine who gets paid first. The higher-rated tranche will have a lower interest rate for lower risk, and the lowest-rated tranche which may even be a junk rating will have a higher interest rate but at the cost of high risk because they may not get paid. It is widely believed that these financial instruments played a big role in the 2008 financial crisis. One problem about collateralized debt obligations is that sometimes they are very complex made up of so many things that nobody really understands what they are and...
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...FI 398 Paper on Liar’s Poker The History of the Secondary Mortgage Market The secondary mortgage market is one of the richest asset classes in the world today. This market is formed by the trading of securities that are backed by commercial and residential mortgages. There are two main assets that are traded. These are Mortgage Backed Securities (MBS), and Collateralized Mortgage Obligations (CMOs). These two distinct asset classes make the market a very profitable one for many large investment corporations. Thanks to legislative action, most notably when Michael Lewis said, “From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes”(121). These legislative policies made owning your own home something more attractive, because borrowing for it went on to benefit you for tax purposes. In the 1970s, the nation’s mortgage portfolio was booming in growth. As Lewis noted, “the volume of outstanding mortgage loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world”(122). These are truly shocking numbers. The growth in the industry was completely unforeseen. While there are several similarities between mortgages and bonds, particularly after the development of MBS and CMOs, they are also different. The main difference is that bonds...
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...NBER WORKING PAPER SERIES THE EFFECTS OF QUANTITATIVE EASING ON INTEREST RATES: CHANNELS AND IMPLICATIONS FOR POLICY Arvind Krishnamurthy Annette Vissing-Jorgensen Working Paper 17555 http://www.nber.org/papers/w17555 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011 We thank Jack Bao, Olivier Blanchard, Greg Duffee, Charlie Evans, Ester Faia, Simon Gilchrist, Robin Greenwood, Monika Piazzesi, David Romer, Thomas Philippon, Tsutomu Watanabe, Justin Wolfers, and participants at seminars and conferences at Brookings, Chicago Fed, Board of Governors of the Federal Reserve, ECB, San Francisco Fed, Princeton University, Northwestern University, CEMFI, University of Pennsylvania (Wharton), Society for Economic Dynamics, NBER Summer Institute, the NAPA Conference on Financial Markets Research, and the European Finance Association for their suggestions. We thank Kevin Crotty and Juan Mendez for research assistance. This paper was prepared for the Brookings Papers on Economic Activity Fall 2011 issue. We have received an honorarium for the presentation of the paper at Brookings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w17555.ack NBER working papers...
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...Study questions: 1. What are the major assumptions and concepts of the structural frame? The structural frame upholds the notion that organizations are judged primarily on and by the proper functioning of those elements which constitute good organization. For the greater part of the 20th century, the assumptions and concepts of scientific management have informed most theories of practice. One of the earliest precursors of scientific management is Max Weber, hired by Frederick the Great to reorganize the Prussian Army, who conceived the “monocratic bureaucracy” as an ideal form that maximized norms of rationality. His model outlined several major features which include: * A fixed division of labor * A hierarchy of offices * A set of rules governing performance * A separation of personal from official property and rights * The use of technical qualifications (not family ties or friendship) for selecting personnel * Employment as primary occupation and long-term career But, if Max Weber “rationalized” the bureaucracy, Frederick Winslow Taylor “hyper-rationalized’ the bureaucracy. Known as the “father” of scientific management”, he sought an objective, scientific mechanism to improve organizational functioning. Based on these two principal intellectual roots, there are six assumptions of the structural frame: * Organizations exist to achieve established goals and objectives * Organizations increase efficiency and enhance...
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...mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) is most correct: A. MBSs are created from CMOs. B. Creating CMOs does not reduce the overall prepayment risk of a mortgage passthrough security. C. The prepayment option of an MBS benefits the security holder. D. The cash flows received on the MBS are quite similar to those of a callable coupon bond. B. Creating a CMO can redistribute the prepayment risk among tranches but it does not alter the overall prepayment risk of a mortgage passthrough security. Although MBS and callable bonds both have reinvestment risk, the cash flows from an MBS are different in that mortgage loans are amortizing. 2. Compared to the underlying MBS, a collateralized mortgage obligation (CMO) tranche: A. has less prepayment risk. B. has lower duration. C. may have more or less prepayment risk. D. Allows an investor to select an exact maturity. C. CMOs redistribute prepayment risk and/or the expected repayment term of the underlying MBS among the CMO tranches. If some tranches have less prepayment risk, other must have more. 3. A domestic investor is purchasing foreign bonds. Which of the following statements regarding the exchange rate risk and price movement of the asset is most correct? A. The depreciation of both the asset and the foreign currency benefits the domestic investor. B. The depreciation of the asset and the appreciation of the foreign currency benefit the domestic investor. C. The appreciation of the asset and the...
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...Economic Crises April 26 Final Exam Short Essays 1. Many economists think that a flexible exchange rate acts like a “shock absorber” in the face of external economic shocks. Explain what this means and why it is (or might be) true. Flexible exchange rates act as a “shock absorber” - Canada’s experience following the Asian Crisis - commodity prices and the Canadian dollar world price of raw materials fell by 30 percent, world is prepared to pay less for our raw materials. This led to dramatic depreciation of CAD. - compare BC and Ontario situations. BC produced a lot of raw materials whose demand fell. The core of manufacturing in Canada is in Ontario (and Quebec) and the resource sectors are largely in the West and very East. When Asian economies go under the tank and reduce their demand for raw materials – the BC economy goes down, they can’t sell stuff to Asia anymore. But the Canadian dollar depreciates by 10 or 15 percent. A depreciating currency helps everybody who is exporting given whatever the price you’re exporting at. Depreciation is a net plus to Ontario, because its machines, etc. gets a bump up in exports. The boost to Ontario offsets the negative to BC somewhat. What happened in 2002-2006 when world demand increased (China and India phenomenon and U.S economic boom) drove up prices, the Canadian dollar appreciated. Ontario was damaged while the East and West of Canada boomed. 2. Describe and explain the connection(s) between the “financial sector”...
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...entire instrument. We will answer these questions by each instrument separately: First, Collateralized Debt Obligation (CDO) Before September30th, 2010, FFC was in an active market, and it determined the fair value of the CDO by using a market-based valuation technique that relies on inputs such as quotes prices for similar CDO securities and requires only insignificant adjustments. After that, there was a significant decrease in the volume and level of activities and the CDO’s market was not active. Besides, significant adjustments are required to determine fair value as of the measurement date given the lack of recent and relevant transactions. The valuation techniques FFC used for CDO is income approach, because this way could maximize the use of relevant observable input and minimize the use of unobservable inputs. There are two factors FFC mainly considered in the fair value measurement. Frist, FFC considered the implied rate of return on September 30, 2010, which is the last date of active market for CDO. This is the Level 1 input. According to ASC820-10-35-40, Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. The other factor considered is two nonbinding indicative quotas for CDO from brokers implied rates of return. This is Level 2 input. According to ASC820-10-35-47, Other observable inputs includes...
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...now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit's supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a "sack of shit." They were selling investors like Ambac a "sack of shit." News of internal whistleblowers coming forward from Bear's mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear's billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear's misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally's mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books. Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear...
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...The Current Mbs And Cmbs Markets – A Summary Of Issues, Causes, And Future Markets The Current MBS and CMBS Markets – A Summary of Issues, Causes, and Future Markets With today’s economic difficulties it is no surprise that the markets for MBS and CMBS are down. The financial market crisis has definitely hit our economy and the MBS and CMBS markets are no exception. The credit meltdown has led to a curious pricing disparity in the commercial MBS market: Triple-A paper with a 5-year term is suddenly trading at spreads way above similarly rated 10-year bonds, due primarily to rising concerns about "extension risk." Last Friday, 10-year super-senior CMBS was trading at 1,050 bp over swaps, while the spread on 5-year notes swelled to 1,300 bp. Over the summer, before the credit markets went into a deep tailspin, the difference between the 5- and 10-year spreads generally was only a few basis points. The pricing difference throws bond-market convention on its head. All things being equal, long-term paper normally commands higher spreads to reflect the greater risk associated with holding investments longer. That started to change in the summer of 2007, when the credit crunch caused bond trading to slow. The benchmark classes of 10-year bonds started trading at slightly tighter spreads than 5-year paper because their larger supply offered more liquidity. But more recently, the gap has ballooned, widening to as much as 400 bp. "The trend has really become noticeable over...
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...FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman This book is an overview of the Commercial Mortgage-Backed Securities (CMBS) market. The contents of this publication are over eight years in the making and include excerpts of research reports from as early as 1997. In this fifth edition of our primer, we have reorganized the chapters to highlight the different investment options within CMBS. New material since our last edition includes sections on the various types of AAA CMBS classes, total rate of return swaps, floating rate large loan transactions, and an updated version of the commercial mortgage default study. We hope you find this book useful and welcome comments so that we can improve future editions. FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about the subject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views or recommendations contained herein. This report has been prepared in accordance with our conflict management policy. The policy describes our organizational and administrative arrangements for the avoidance, management and disclosure...
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...1. Background Introduction This paper looks into Cox Proportional Hazards model and constructs a mortgage default model to estimate the hazard rates of certain residential mortgage-backed securities (RMBS) on a loan-level basis. We analyze loans from an individual credit perspective instead of pool-level basis so that the model would closely fit each loan. This gives us the flexibility to adjust portfolio by observing individual loans and re-estimate their risks accordingly. Ever since early 2000s, the issuance of residential mortgage-backed securities were steadily climbing due to the record-setting housing boom we have ever witnessed, then reached the peak at $1.2 trillion in 2005 and 2006, and finally became the center of attention during the crisis. Many investors have been trying to come up with newer and better models to monitor the default risk of RMBS ever since. Now that a majority of RMBS have been downgraded by credit-rating agencies since, it is necessary for investors to learn how to estimate the risk of their mortgage-backed securities to react to the adverse situation. We will skip the background of securitization and structure of mortgage-backed securities. In short, a pool of securitized mortgages gets divided into multiple tranches with different seniorities, ranging from AAA to equity. The higher the seniority goes, the lower risk and return the investors have, and they suffer losses after the lower seniorities do. Although investors look at a pool or...
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...The Current MBS and CMBS Markets – A Summary of Issues, Causes, and Future Markets With today’s economic difficulties it is no surprise that the markets for MBS and CMBS are down. The financial market crisis has definitely hit our economy and the MBS and CMBS markets are no exception. The credit meltdown has led to a curious pricing disparity in the commercial MBS market: Triple-A paper with a 5-year term is suddenly trading at spreads way above similarly rated 10-year bonds, due primarily to rising concerns about "extension risk." Last Friday, 10-year super-senior CMBS was trading at 1,050 bp over swaps, while the spread on 5-year notes swelled to 1,300 bp. Over the summer, before the credit markets went into a deep tailspin, the difference between the 5- and 10-year spreads generally was only a few basis points. The pricing difference throws bond-market convention on its head. All things being equal, long-term paper normally commands higher spreads to reflect the greater risk associated with holding investments longer. That started to change in the summer of 2007, when the credit crunch caused bond trading to slow. The benchmark classes of 10-year bonds started trading at slightly tighter spreads than 5-year paper because their larger supply offered more liquidity. But more recently, the gap has ballooned, widening to as much as 400 bp. "The trend has really become noticeable over the past month," one investor said. The new concern about 5-year CMBS is that the timely payoff...
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