The Securitization Markets Handbook: Structures and Dynamics of Mortgage - and Asset-Backed Securities

by Charles Austin Stone; Anne Zissu

• ISBN13: 9780470884843
• ISBN10: 0470884843
• Format: eBook
• Copyright: 2010-05-01
• Publisher: Bloomberg Press

Summary

In this long-awaited handbook, noted experts Charles Stone and Anne Zissu provide an enlightening overview of how securitization works and explain how future cash flows from various asset classes-from credit card receipts to mortgage payments-can be packaged into bond-like products and sold to investors. Once a marginal source of funds, securitization is now an essential corporate funding technique widely adopted by financial and industrial companies throughout the world to finance both working capital and capital budgets. It is also used as a risk-management tool and a source of liquidity. Securitization has been adapted to fund corporate acquisitions, to capitalize future streams of revenue, and to liquidate pools of nonperforming loans. With examples from companies such as GE Capital, Ford Motor Credit, Countrywide Home Loans, and D&K Healthcare, The Securitization Markets Handbook provides descriptions of all major classes of asset-backed securities and offers a practice-oriented commentary on trends in securitization and the value of asset- and mortgage-backed securities across industries and throughout the global markets. The authors approach the topic from both sides of the market: the supply side, where assets are securitized and mortgage- and asset-backed securities are issued, and the demand side, where investors choose which classes of mortgage and asset-backed securities will enhance their portfolios or serve as efficient hedges. The book's detailed explanations and practical examples make it a valuable guide both for experienced money managers trying to put a securitization strategy into place and for those new to securitization looking to acquire a broad and strong foundation in the subject.

Table of Contents

List of Exhibits

Acknowledgments

Introduction

Key Structures and Cash Flow Dynamics

Mortgage-Backed Securities

Origins of the Market

From the Primary to the Secondary Mortgage Market

The Agency Market

The Private-Label Market

Agency and Nonagency Market Segments Compared

Credit Risk Considerations

Mortgage and Funds Flow in the Secondary Market

Industry Illustration

Pricing of Newly Originated Mortgages

Freddie Mac Sample Purchase Pricing

Mortgage Pricing from the Bank's Perspective

Price Dynamics of Mortgages and Cash Flows

Bond and Mortgage Basics

Bond Valuation

Price/Yield Relationship

Fixed-Rate Mortgages

Prepayment Option

Macauley and Modified Duration

Convexity

Risk Exposures

Valuation of Mortgage- and Asset-Backed Securities

Modeling Cash Flows of Pass-Through, PO, and IO Securities

Information Set

Cash Flow over Time

Effective Duration

Effective Convexity

Case Study: A Pass-Through Security Issued by FNMA

Prepayment Standard Assumption Levels

S-Curve Prepayment Function

Weighted Average Life and Different Spreads Measurements

Spread I, Static Spread (Spread Z), and Spread S

Option-Adjusted Spread

Negative Option Cost

Case Study: Principal-Only and Interest-Only Securities

PO Strip

IO Strip

Other Structures in Asset-Backed Securities

CMOs, PACs, Floaters, and Inverse Floaters

Collateralized Mortgage Obligations

Planned Amortization Class

Floaters and Inverse Floaters

Corporate Debt and the Securitization Markets

How Ford Motor Credit Corporation

Has Used Securitization

The Case of Ford Motor Credit

Securitized Receivables

Advantages of Securitization

Special-Purpose Structure

Allocating and Funding Credit Risk: Subordinate Classes

and Residual Interests

The Two-Step Securitization Transaction

Credit Ratings and On-Balance-Sheet versus Off-Balance-Sheet

Cost of Funding

Ford Credit Auto Owner Trust 2000-A: A Case Study

Waterfall of Cash Flows

Credit Enhancement

Overcollateralization

Rating Agency Parameters

Leveraging Credit Risk

Asset-Backed Commercial Paper

Why Companies Use Asset-Backed Commercial Paper Programs

GE Capital Example

Ford Motor Credit Example

Countrywide Home Loans Example

ABCP Characteristics

Relationship of Conduit, Originator, and Seller

Securitization Structure and Cash Flow

Credit Enhancement and Liquidity Support

Fully Supported versus Partially Supported

Liquidity Facilities

Cost of Funding

Financier Conduit Hypothetical Example

D&K Example

GE Capital Example

Labor Ready, Inc., Example

Accounting Treatment

Financial Interpretation

Primary Beneficiary Status

Risk-Based Capital Regulations

Tier-One Leverage Ratio

Conversion Factor for Liquidity Facilities

Restructuring Possibilities

Securitization of Revolving Credit

Dealer Floor Plan Loans

Trends in Wholesale Automobile Credit Securitization

Basics of the Securitization Scheme

Credit Enhancement

Payment Phases

Uncertain Maturity Date and Fluctuating Account Balance

Considerations

Securing Liquidity

Shifts in Seller's Interest and Investor Interest

Seller's Claim on Receivable Pool

Factors in Credit Line Variability

Pool Size Matters

Credit Card Receivables

Elements of a Master Trust Pooling and Servicing Agreement

Basics of the Securitization Scheme

Cash Flow Allocation

Principal Collections and Reallocations

Finance-Charge and Remaining Collections

Case Study: MBNA Master Credit Card Trust II

The Seller's Interest and Investor Interest

Retained Interest

Accounting Treatment

Sources of and Changes in Securitization Income

Credit Risk and Credit Enhancement

Case Study: MBNA Credit Card Master Note Trust

Tranches for A, B, and C Classes

ERISA Restrictions

Searching for Value in the Mortgage- and Asset-Backed Markets

Investment, Speculation, and Hedging

Target Investment

Subordinate Segment of Private-Label MBSs

Interest-Rate Risk

Reinvestment of Cash Flow

Interest-Only Strips as a Hedging Tool

Combining Bonds and IOs

Hedging FNMA 9.5 Percent Pass-Through Securities with IO Securities

Principal-Only Strips as a Hedging Tool

Inverse Floaters as a Hedging Tool

Hedging CMOs with Options on Treasury Bonds

Credit Risk

Direct Financing of Risk versus Buying a Financial Guaranty

A Financial Guaranty Is Not an Insurance Contract

Selecting Efficient Forms and Levels of Credit Enhancement

Relative Value in Credit-Enhancement Structures

Index

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