Chapter 1: Introduction to Securitization

Andrew Davidson
Anthony B. Sanders
Lan-Ling Wolff
Anne Ching
 The Role of Securitization

 The process of packaging financial promises and

transforming them into a form whereby they can be freely
transferred among a multitude of investors is
securitization.
 The transformation of the raw assets into a form that is
more desirable for investors often involves segmenting
cash flows and risks, through a process called
structuring.

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 Table 1.1 Summary of Major Asset Classes

Manufactured Equipment
MBS Credit Cards Auto Home Equity Housing Student Loans Leases Total
1995 1863.2 153.1 59.5 33.1 11.2 3.7 10.6 2134.4
1996 2040.8 180.7 71.4 51.6 14.6 10.1 23.7 2392.9
1997 2239.4 214.5 77.0 90.2 19.1 18.3 35.2 2693.7
1998 2589.8 236.7 86.9 124.2 25.0 25.0 41.4 3129.0
1999 2954.8 257.9 114.1 141.9 33.8 36.4 51.4 3590.3
2000 3232.3 306.3 133.1 151.5 36.9 41.1 58.8 3960.0
2001 3717.4 361.9 187.9 185.1 42.7 60.2 70.2 4625.4
Source: The Bond Market Association & Federal Reserve Bulletin

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 Figure 1.1 Composition of Outstanding Securitization in
2001

SL EL
MH 1.3% 1.5%
0.9%
HEL
4.0%
Auto
4.1%

Credit Cards
7.8%

MBS
80.4%

HEL=Home Equity Loans MH= Manufactured Housing SL=Student Loans EL=Equipment Leases
Source: Bond Market Association, Federal Reserve Bulletin

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Figure 1.2 Volume of MBS & ABS Issuance, 1995-2001

1600

1400

1200

1000
Student Loans
Manufactured Housing
$ billions 800 Home Equity Loans
Autos
Credit Cards
600 Agency & Private-Label MBS

400

200

0
1995 1996 1997 1998 1999 2000 2001

Source: 2002 Mortgage Market Statistical Annual.The Bond Market Association.

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 Figure 1.3 Volume of ABS Issuance, 1995-2001

350

300

250

Other
200
Student Loans
$ billions Manufactured Housing
Home Equity Loans
150 Autos
Credit Cards

100

50

0
1995 1996 1997 1998 1999 2000 2001
Source: 2002 Mortgage Market Statistical Annual

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 Figure 1.4 Allocation of Proceeds

102

Mortgage Broker
Mortgage Banker
Dealer
100
Borrower

98
Price

Borrower Receives
96
Investor Pays

94

92

90

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 Figure 1.5 Distribution of Interest Payments
9

Guarantor
Investor Receives

Borrower Pays
5
Servicer
Spread to Investor
Interest

Option Cost to Investor

4 Duration Cost to Investor
Funding Cost to Investor

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 Key Concepts

 Collateral
 Credit Enhancement
 Standardization
 Liquidity

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 Key Players in Securitization

 Borrower
 Mortgage Broker
 Mortgage Banker
 Dealer
 Lawyers
 Accountants
 Rating Agencies
 Servicer
 Guarantor
 Trustee

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 Key Investment Characteristics of Securities (Bonds)

 Financial instruments
 Timing of repayment of principal

 Amount and form of interest paid on the amount of

outstanding principal
 The credit quality of the instrument.

 Interest payments
 Fixed-rate bonds pay a constant rate of interest on the

outstanding principal balance.

 Floating-rate bonds pay a coupon that varies over time.

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