Asset Securitization E-Book

Joseph Hu

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 422

Veröffentlichungsjahr: 2010

Beschreibung

Asset Securitization is intended for beginners and market professionals alike who are interested in learning about asset securitization--its concepts and practices. It is designed so that the readers will come away with a fundamental but comprehensive understanding of the asset securitization market. As such, the book aims to provide a review of the market's development, necessary framework, potential benefits, and detailed descriptions of major asset securitization products. Part I of the book, which consists of four chapters, will discuss the fundamental concepts, the funding efficiency, the market participants, and the potential benefits of asset securitization. An analysis of mortgage finance will be provided in Part II, which consists of six chapters that cover a variety of topics from the description of many different types of residential mortgages to the securitization of different types of residential mortgages, including the now infamous sub-prime mortgages. Also included are important topics, such as prepayments, cash flow structure, maturity and credit tranching, and the trading and relative value of the various mortgage-backed securities. The three chapters in Part III will explain the other major asset securitization products, such as commercial mortgage-backed securities, credit card receivable-backed securities, auto loan-backed securities, and collateralized bond obligations. Part IV has two chapters: one reviews the collapse and the potential recovery of the asset securitization market, and the other describes the asset securitization efforts in Japan, Australia, Taiwan, and China. Extensive tables and charts are presented to help illustrate a concept or describe a product. Neither analytical discussions nor investment strategies of the various asset-backed securities are included as they are not the focus of this book.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

Introduction

Part One: Basics of Asset Securitization

Chapter 1: Asset Securitization: Concept and Market Development

Basic Concept of Asset Securitization

Development of the Asset Securitization Market in the United States

Chapter 2: Originators and Investors of the Asset Securitization Market

Efficient Financing for Originators with Asset Securitization

Satisfying Varying Investor Demands with Asset Securitization

Chapter 3: Intermediary Participants of the Asset Securitization Market

Attorneys

Accountants

Guarantors and Credit Enhancers

Credit Rating Agencies

Investment Bankers

Chapter 4: Necessary Ingredients and Benefits of Asset Securitization

The Nine Necessary Ingredients

Benefits of Asset Securitization

Part Two: Residential Mortgages and Securitization of Residential Mortgages

Chapter 5: Residential Mortgages

Description of a Residential Mortgage

Characteristics of a Fixed-Rate Mortgage

Alternative Mortgages

Chapter 6: The Residential Mortgage Market

The Origination of a Residential Mortgage

Mortgage Originators

Mortgage Servicers

Mortgage Insurers

The Development of the Residential Mortgage Market

Chapter 7: Residential Mortgage Pass-Through Securities

Mortgage Pass-Throughs

Trading and Relative Value of Pass-Throughs

Chapter 8: Multiclass Mortgage Pass-Throughs

Prepayment of Mortgage Pass-Throughs

The Need for Multiclass Securities

Collateralized Mortgage Obligations

Real Estate Mortgage Investment Conduits

The Rise, Collapse, and Recovery of REMICs

Trading and Relative Value

Chapter 9: Private-Label Mortgage Pass-Throughs

The Growth of the Private-Label Pass-Through Market

A Typical Transaction

Credit Rating Criteria

Performance of Credit Ratings

Prepayment Pattern

Trading and Relative Value

Chapter 10: Subprime Mortgage-Backed Securities

Evolution of the Subprime Mortgage Market

Features of Home Equity Loans

Varying Characteristics of Pools of Subprime Mortgages

Examples of Transactions

Unique Prepayment Pattern

Performance of Credit Ratings

Trading and Relative Value

Part Three: Securitization of Commercial Mortgages and Consumer Loans

Chapter 11: Commercial Mortgage-Backed Securities

The Growth of the CMBS Market

The Origination of a Commercial Mortgage

Defaults and Losses of Commercial Mortgages

A Typical Transaction

Performance of Credit Ratings

Trading and Relative Value

Chapter 12: Asset-Backed Securities

The Growth of the ABS Market

Credit Card ABS

Auto Loan ABS

Performance of Credit Ratings

Trading and Relative Value

Chapter 13: Collateralized Debt Obligations

Basic Concept and Market Development of CDOs

CDOs are not Mutual Funds

Different Structural Types of CDOs

Motivations for Issuing CDOs

Incentives for Investing in CDOs

Structuring and Credit Rating CDOs

A Simulation Model to Structure CDOs

Trading and Relative Value

Part Four: The Current Asset Securitization Market in the United States and Asia-Pacific

Chapter 14: The Collapse and Recovery Prospects of the Asset Securitization Market

How the Market Collapsed

Prospects for Recovery

Chapter 15: Asset Securitization in Asia-Pacific

Asset Securitization in Japan

Asset Securitization in Australia

Different Patterns of Asset Securitization in Japan and Australia

Asset Securitization in Taiwan

Asset Securitization in China

Appendix A: Analysis of Prepayment and Prepayment Rate

Measurements of Prepayment Rate

Two Fundamental Reasons for Prepayment

Appendix B: Housing Price Appreciation and Mortgage Credit Performance

The Importance of Housing Price Appreciation

Credit Performance of Mortgages

Appendix C: Fundamental Elements in Credit Ratings

Evaluating Credit Quality of the Underlying Assets

Reviewing Payment Structure and Cash-Flow Mechanics

Analyzing Legal and Regulatory Risks

Assessing Operational and Administrative Risks

Examining Third-Party Dependencies

Appendix D: The Collapse of the Asset Securitization Market

Index

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Published in 2011 by John Wiley & Sons (Asia) Pte. Ltd.

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Library of Congress Cataloging-in-Publication Data

ISBN 978-0-470-82603-4 (Hard cover)

ISBN 978-0-470-82898-4 (e-PDF)

ISBN 978-0-470-82897-7 (e-Mobi)

ISBN 978-0-470-82899-1 (e-Pub)

Preface

This book, Asset Securitization: Theory and Practice, is based on my 30 years of observations and work experience in the U.S. asset securitization market. It is a celebration of this efficient financing method that has, over the last four decades, benefited lenders, borrowers, and investors alike. As a capstone for a career spent in some of the major investment banking firms and a leading credit rating agency, this book is also written with an unavoidable tinge of sadness. Powerhouses such as Salomon Brothers, Bear Stearns, and Lehman Brothers, and venerable investment firms like E. F. Hutton—places I admired or worked and honed my analytical skills at as a young man—have been swept away by the change of times or mismanagement. And the asset securitization market was almost destroyed by greed, abuse, and complacency. As a market practitioner who believes in the power of asset securitization, and contributed in a small way to its success, the events of the last three years have been painful to witness. However, ever the optimist, I am hopeful that the market will storm back bigger, better, and stronger, to once again provide financing to consumers and businesses, creating wealth for our society.

This book could not have been published without the help of many of my colleagues and friends. I would like to thank Rocco Sta. Maria, Head of Sales and Client Services for Standard & Poor's in Asia-Pacific, for putting me in touch with John Wiley & Sons. I am grateful for the assistance extended to me by my colleagues at Standard & Poor's offices in Tokyo (Yu-Tsung Chang), Melbourne (Vera Chaplin), Beijing (Li Jian), Hong Kong (Frank Lu), and Taipei (Aaron Lai), who provided insights into the development of the Japanese, Australian, Chinese, and Taiwanese asset securitization markets. I would also like to express my gratitude to K. C. Yu, Deputy CEO of SinoPac Holdings and Nick Ding of Standard & Poor's Beijing office, for providing me access to up-to-date market information. Over the years, the excellent market commentaries of Citigroup Global Markets, J. P. Morgan Securities, Merrill Lynch, Morgan Stanley, and UBS Securities kept me abreast of the asset securitization market. I would also like to thank many of my friends who helped me clarify and improve the content of this book. Additionally, I greatly appreciate the assistance of Nick Melchior, Senior Publishing Editor, John Wiley & Sons, without whose encouragement and enthusiasm this book would not have been completed so expeditiously. Though I am solely responsible for the content of this book, the skills and professionalism of my copy editor, Michael Hanrahan, made the text eminently more readable. Finally, I wish to thank my wife, Linda, and my children, Justin and Brian. Their love and support made the writing of this book and, in fact, my whole professional journey all the more rewarding and enjoyable.

Joseph HuNovember 2010

Introduction

In A Tale of Two Cities, Charles Dickens described the chaotic and brutal period of the French Revolution as the best of times and the worst of times. For the asset securitization market, one might similarly regard the period after the subprime mortgage debacle that caused panic and tremendous financial loss worldwide as the worst of times—the winter of hindsight and reflection. Yet this period can also be viewed as the spring of hope and rebirth, and as the best time to study the concept and practice of asset securitization, to once again make it a powerful financial engine that creates wealth and prosperity.

Over the last 40 years, the asset securitization market has grown and flourished to become the largest sector of the U.S. fixed-income securities market. In the initial development of the asset securitization market in 1970, residential mortgages were the only type of securitized assets. Remarkably, however, since the mid-1980s, many other types of financial assets with a predictable future receivable cash flow began to be utilized as the underlying asset for the issuance of asset-backed securities. These assets include, but are not limited to, commercial mortgages, credit card receivables, auto loans, student loans, equipment leases, and small business loans. By facilitating the funding of consumption and business activities, asset securitization has contributed substantially to the steady growth of the U.S. economy and the increase in the American standard of living. Asset securitization has been the living proof of the adage, “finance creates value.”

Alas, asset securitization became the victim of its own success. With the abundance of funds available to be invested, market participants became overly creative with the underlying assets of their originations and created a variety of new asset-backed securities. Throwing caution to the wind, originations of residential mortgages—the securitization market's most prominent and best performing underlying assets—began to grossly deviate from prudent underwriting guidelines. Driven by greed, more and more of the low-credit-quality (subprime) mortgages were originated and their inherent credit risks were consistently underestimated. When incidences of delinquencies and defaults of these mortgages became abnormally frequent, investors were alarmed and began to shy away from subprime mortgage-backed securities. Like dominos, fear and panic quickly spread to the mortgage-backed securities market and eventually put a strangle hold on other sectors of the capital market as well.

A credit risk problem created a liquidity problem so severe that funding became unavailable to consumption and business activities. Since late 2007, the U.S. economy has experienced the worst contraction both in depth and duration since the Great Depression. The rest of the world has been similarly impacted with their economies languishing in a severe downturn. In the initial panic, “asset securitization” became one of the most vilified and demonized financial terms in the world. Critics questioned the justification of such a market and there were doubts aplenty about whether the asset securitization market would ever recover. It would seem that this is indeed the worst time for asset securitization. Yet, the bottom of the market is the perfect place and time to examine asset securitization anew—its successes and failures—and plan for a future asset securitization market that is transparent, self-disciplined, and rigorous in its regulation and supervision.

This book is intended for students and entry-level market professionals alike who are interested in learning about asset securitization—its concepts and practices. It is designed so that the readers will come away with a fundamental but comprehensive understanding of the asset securitization market. As such, the book aims to provide a review of the market's development, necessary framework, potential benefits, and detailed descriptions of major asset securitization products.

1Part 1 of the book, which consists of four chapters, will discuss the fundamental concepts, the funding efficiency, the market participants, and the potential benefits of asset securitization. An analysis of mortgage finance will be provided in 5Part 2, which consists of six chapters. They cover a variety of topics from the description of many different types of residential mortgages to the securitization of these mortgages, including the now infamous subprime mortgages. Also included are important topics, such as prepayments, cash-flow structure, maturity and credit tranching, and the trading and relative value of the various mortgage-backed securities. The three chapters in 11Part 3 will explain the other major asset securitization products, such as commercial mortgage-backed securities, credit card receivable-backed securities, auto loan-backed securities, and collateralized bond obligations. 14Part 4 has two chapters: one reviews the collapse and the potential recovery of the asset securitization market, and the other describes the asset securitization efforts in Japan, Australia, Taiwan, and China.

Extensive tables and charts are presented to help illustrate a concept or describe a product. Neither analytical discussions nor investment strategies of the various asset-backed securities are included as they are not the focus of this book.

It is hoped that, after reading this book, students of asset securitization will gain new insight into and appreciation for the creative financial instruments that make up this market. And be mindful of the critical lesson learned that not all good things need come to an end, if prudence is always the guiding principle of our behavior in the financial market.

Part One

Basics of Asset Securitization

Chapter 1

Asset Securitization: Concept and Market Development

The concept and market practice of asset securitization started in 1970, when mortgage bankers pooled their newly originated residential mortgages and issued residential mortgage-backed securities. By issuing residential mortgage-backed securities, mortgage bankers were able to raise funds more efficiently in the capital market to finance their originations of residential mortgages.1 It took only 20 years for the asset securitization market to become the largest sector in the U.S. capital market, with the outstanding balance exceeding one trillion dollars. In the early development of the asset securitization market, residential mortgages were the only type of underlying assets that were being securitized. Since the mid-1980s, a great variety of financial assets that had predictable and steady future receivable cash flows have been utilized as the underlying assets for securitization.

This chapter will first discuss the basic concept of asset securitization. It will then present the development history of the asset securitization market in the United States over the past 40 years.

Basic Concept of Asset Securitization

Asset securitization is an innovative way for lenders to raise funds in the capital market by selling the future receivable cash flows of their assets.2 The cash flows are sold in the form of securities that are backed by the cash flows of the very assets sold. The securities are therefore called asset-backed securities. This method of financing differs from the traditional means of raising funds by attracting deposits or borrowing in the form of loans. It is also different from issuing debt or equity securities (bonds or stocks) to obtain funds in the capital market.

Issuers of asset-backed securities are mostly originators of the assets backing the securities. These assets can be a wide variety of residential or commercial mortgages, consumer loans, commercial leases, or any financial instruments that have predictable and stable receivable cash flows. In recent years, there have been new and popular asset-backed securities that are supported by assets that are corporate bonds, commercial and industrial loans, or even asset-backed securities themselves.