Securitization Chapter 28 - National Cheng Kung University
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Transcript Securitization Chapter 28 - National Cheng Kung University
Securitization
Chapter 28
Financial Institutions Management, 3/e
By Anthony Saunders
Irwin/McGraw-Hill
1
Introduction
Securitization: Packaging and selling of
loans and other assets backed by securities.
• Many types of loans and assets are being
repackaged in this fashion including royalties
on recordings ( David Bowie, Rod Stewart).
• Original use was to enhance the liquidity of the
residential mortgage market.
Irwin/McGraw-Hill
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Securitization
Government National Mortgage Association
(GNMA)
• Sponsors MBS programs and acts as a
guarantor.
• Timing insurance.
FNMA actually creates MBSs by
purchasing packages of mortgage loans.
Irwin/McGraw-Hill
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Freddie Mac
Federal Home Loan Mortgage Corporation
• Similar function to FNMA except major role
has involved savings banks.
• Stockholder owned with line of credit from the
Treasury.
• Sponsors conventional loan pools as well as
FHA/VA mortgage pools.
Irwin/McGraw-Hill
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Incentives and Mechanics of PassThrough Security Creation
Example:
• Create a mortgage pool from one-thousand,
$100,000 mortgages (Results in $100 million).
• Each mortgage receives credit risk protection
from FHA.
• Capital requirement: $4 million.
• Must issue more than $96 million in liabilities
due to reserve requirements. (+ FDIC premia).
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Further Incentives
Gap exposure
Illiquidity exposure
Default risk by mortgagees
• Phoenix, AZ in 1980s.
Default risk by bank/trustee
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Effects of prepayments
Good news effects
• Lower market yields increase present value of
cash flows.
• Principal received sooner.
Bad news effects
• Fewer interest payments in total.
• Reinvestment at lower rates.
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Prepayment effects
Prepayments result of sales or refinancing.
• Since prepayment affects the cash flows to
MBS, pricing models require estimates of the
prepayment rates.
• Methods:
» Option pricing approach.
» Public Securities Association approach.
» Empirical approach.
Irwin/McGraw-Hill
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Option Model Approach
Use option pricing theory to figure fair yield
spread of pass-throughs over Treasuries.
Fair price on pass-through decomposable
into two parts
• PGNMA = PTBOND - PPREPAYMENT OPTION
Option-adjusted spread between GNMAs
and T-bonds reflects value of a call option.
Irwin/McGraw-Hill
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Collateralized Mortgage Obligation
(CMO)
CMO structure
• Prepayment effects differ across tranches
(classes).
• Z-Class CMO.
• Improves marketability of the bonds.
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Mortgage-Backed Bonds (MBBs)
Normally remain on the balance sheet.
Regulatory concerns.
Other drawbacks to MBBs.
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Innovations in Securitization
Pass-through strips
• IO strips
» Negative duration.
• PO strips
Securitization of other assets
• CARDs
• Various receivables, loans, junk bonds, ARMs.
Irwin/McGraw-Hill
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