Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Kritarth Desai. A short summary of this paper. Giddy globalsecuritization. Securitization refers to the process of converting debt assets, usually illiquid assets into securities, which are then bought and sold in the financial markets.
If you notice, the first line calls debt as an asset. This is because debt is a liability for the borrower, but for the lender, it is an asset. One can trade securities created from securitization similar to stocks, bonds and futures contracts. In simple words, securitization is a process where a financial company combines several of its assets into consolidated financial instrument or securities. Then, financial companies issue these securities to the investors, who earn interest.
ABS usually pools different assets like a credit card, auto loans and more, while MBS pools mortgage only. As said before, banks or financial institutions securitize primarily illiquid assets. One can easily convert a liquid asset into cash, for example, gold.
Real estate is a good example of it. Finding a buyer for a property is not always an easy task. Similarly, mortgages are valuable assets but are mostly illiquid. Mortgages are usually backed by real estate, which again is illiquid. Though mortgages offer a healthy return in the form of the homeowner paying interest, it can take many years as long as 30 years to realize it in full.
With the help of MBS and ABS, an originator can transfer risk by transferring financial assets and convert illiquid assets into tradable securities. The assets, once separated from the originator, are employed as backing for securities.
ABS and MBS offer alternative market-based financing, and other benefits like improved hedging and risk management through diversification, credit enhancement, enhanced balance sheet management and restructuring and efficient refinancing cost. Innovations and increasing complexity in MBS and ABS warrant a thorough understanding of the nuances behind these securities, hence, this book brings forward these issues.
The book also highlights the role of securitization in the current subprime crisis of USA. The book is presented in three sections and contains fourteen articles. The first section Concepts includes articles on the role of securitization in mortgage lending, asset-backed securities, collateralized debt obligations CDOs — an introduction, understanding commercial real estate CDOs and how they are revolutionizing real estate finance and the commercial paper market and special investment vehicles.
The second section Perspectives contains articles on using a credit portfolio model to rate securitizations, the rise of the European CRE CDOs market, mortgage backed securities and financial innovation experience of Malaysia, and managing risks embedded in mortgage contract: a baseline study of MBS in USA and Germany.
In the mortgage market, securitization converts mortgages to mortgage-backed securities MBS. The article highlights three major risks to MBS investors, viz, interest rate risk, prepayment risk and default risk. Pools of MBSs are sometimes collected and securitized. Bonds that are themselves backed by pools of bonds are referred to as collateralized debt obligations CDOs. ABS is backed by securities that obtain return from an individual asset or basket of assets.
The different types of risks involved in investing in asset-backed securities are interest rate risk, reinvestment risk, market risk, selection risk, timing risk, credit risk, default risk, event risk and early amortization risk. The article briefly discusses the various types of assets that are backed by securities and ABS future prospects. The major and most common sectors of assets-backed securities are mortgage-backed securities, home equity loans, credit cards receivables, auto loans-backed securities, student loans asset-backed securities and collateralized debt obligations.
The credit risk transfer from the CDO manager to investors can occur either on a funded, unfunded, or partially funded basis. The article explains the developments leading to the growth of credit default swaps referenced to asset-backed securities ABCDS. Commercial paper is a low-cost alternative to bank loans. It has become an important debt market because of the advantages of commercial paper for both investors and issuers.
Commercial paper is issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms. Finance companies are the biggest issuers which provide consumers with home loans, unsecured personal loans and retail automobile loans.
They provide businesses with a variety of short- and medium-term loans including secured loans to finance purchases of equipment for resale.
0コメント