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Securitization - Coggle Diagram
Securitization
Three Major Forms of asset Securitization
Structured Investment Vehicles
CMOs
Mortgaged backed bond issued in multiple classes or tranches
strucutre
PRepayment effects differ across tranches (classes
If underlying mortgages prepay, then class a gets paid down first, then class B
Z CLass
R Class
Improves marketability of the bond
Pass Through Securitization
mortgage securities "pass through" promised payments by households of principal and interest on pools of mortgages created by FIs to secondary market investors
Incentives of Pass Through Securitization
Long Term originators
Swap Long term assets for short assets
redeploy cash t o make more loans
For investors
exposure to mortgage assets without being an FI
Small investors can take part in MBS ETFs
Government Sponsored Entities
work with asset secritization
Government National Mortgage (Ginnie Mae)
Federal National Mortgage Association (Fannie Mae)
Federal Home Loan Mortgage Corporation (Freddie Mac)
Mortgages Backed Bonds
normally remain on balance sheet
regulatory concerns
other drawbacks to MBBs
Securitization Mechanism by FI to manage risk exposure and improve liquidity
COnversion of ON -balance sheet asset to securities
Structured Investment Vehicles
Special Purpose Entities
Profitability relies on mainiting high credit rating
Prominent role in 08-09 financial crisis
Prepayments Effects
likely when interest rates are decreasing
prepayments results of:
refiniancing
Housing turnover
most GNMA pools allow assumable mortgages
Innovation in securitization
Mortgages pass-thorugh strips
IO strip is a bond sold to investors whose cash flows reflect the monthly interest payments received from
Role of Securitization