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Introduction to Securitization

Book Description

Introduction to Securitization outlines the basics of securitization, addressing applications for this technology to mortgages, collateralized debt obligations, future flows, credit cards, and auto loans. The authors present a comprehensive overview of the topic based on the experience they have gathered through years of interaction with practitioners and graduate students around the world. The authors offer coverage of such key topics as: structuring agency MBS deals and nonagency deals, credit enhancements and sizing, using interest rate derivatives in securitization transactions, asset classes securitized, operational risk factors, implications for financial markets, and applying securitization technology to CDOs. Finally, in the appendices, the authors provide an essential introduction to credit derivatives, an explanation of the methodology for the valuation of MBS/ABS, and the estimation of interest rate risk.

Securitization is a financial technique that pools assets together and, in effect, turns them into a tradable security. The end result of a securitization transaction is that a corporation can obtain proceeds by selling assets and not borrowing funds. In real life, many securitization structures are quite complex and enigmatic for practitioners, investors, and finance students. Typically, books detailing this topic are either too lengthy, too technical, or too superficial in their presentation. Introduction to Securitization is the first to offer essential information on this topic at a fundamental, yet comprehensive level-providing readers with a working understanding of what has become one of today's most important areas of finance.

Authors Frank Fabozzi and Vinod Kothari, internationally recognized experts in the field, clearly define securitization, contrast it with corporate finance, and explain its advantages. They carefully illustrate the structuring of asset-backed securities (ABS) transactions, including agency mortgage-backed securities (MBS) deals and nonagency deals, and show the use of credit enhancements and interest rate derivatives in such transactions. They review the collateral classes in ABS, such as retail loans, credit cards, and future flows, and discuss ongoing funding vehicles such as asset-backed commercial paper conduits and other structured vehicles. And they explain the different types of collateralized debt obligations (CDOs) and structured credit, detailing their structuring and analysis. To complement the discussion, an introduction to credit derivatives is also provided.

The authors conclude with a close look at securitization's impact on the financial markets and the economy, with a review of the now well-documented problems of the securitization of one asset class: subprime mortgages. While questions about the contribution of securitization have been tainted by the subprime mortgage crisis, it remains an important process for corporations, municipalities, and government entities seeking funding. The significance of this financial innovation is that it has been an important form of raising capital for corporations and government entities throughout the world, as well as a vehicle for risk management. Introduction to Securitization offers practitioners and students a simple and comprehensive entry into the interesting world of securitization and structured credit.

Table of Contents

  1. The Frank J. Fabozzi Series
  2. Title Page
  3. Copyright Page
  4. Dedication
  5. Preface
  6. About the Authors
  7. PART One
    1. CHAPTER 1 - Introduction
      1. WHAT IS A SECURITIZATION?
      2. ILLUSTRATION OF A SECURITIZATION
      3. SECURITIES ISSUED IN A SECURITIZATION
      4. KEY POINTS OF THE CHAPTER
    2. CHAPTER 2 - Issuer Motivation for Securitizing Assets and the Goals of Structuring
      1. REASONS SECURITIZATION IS USED FOR FUNDING
      2. STRUCTURING GOALS
      3. KEY POINTS OF THE CHAPTER
  8. PART Two - Structuring ABS Transactions
    1. CHAPTER 3 - Structuring Agency MBS Deals
      1. PREPAYMENTS AND PREPAYMENT CONVENTIONS
      2. SEQUENTIAL PAY STRUCTURES
      3. PLANNED AMORTIZATION CLASS BONDS AND SUPPORT BONDS
      4. TARGETED AMORTIZATION CLASS BONDS
      5. ACCRUAL BONDS AND ACCRETION-DIRECTED BONDS
      6. FLOATING RATE BOND CLASSES
      7. NOTIONAL INTEREST-ONLY BOND CLASSES
      8. KEY POINTS OF THE CHAPTER
    2. CHAPTER 4 - Structuring Nonagency Deals
      1. IDENTIFICATION OF THE ASSET POOL
      2. SELECTION OF THE ASSETS
      3. IDENTIFICATION OF RISKS
      4. DETERMINATION OF THE SOURCES AND SIZE OF CREDIT SUPPORT
      5. DETERMINATION OF THE BOND CLASSES
      6. TIME TRANCHING OF BOND CLASSES
      7. SELECTING THE PAY-DOWN STRUCTURE FOR THE BOND CLASSES
      8. DETERMINATION OF THE AMOUNT AND SOURCES FOR LIQUIDITY SUPPORT
      9. DETERMINING IF ANY PREPAYMENT PROTECTION IS NEEDED
      10. INCLUSION OF STRUCTURAL PROTECTION TRIGGERS
      11. KEY POINTS OF THE CHAPTER
    3. CHAPTER 5 - Credit Enhancements
      1. CREDIT ENHANCEMENT MECHANISMS
      2. SIZING OF CREDIT ENHANCEMENTS
      3. KEY POINTS OF THE CHAPTER
    4. CHAPTER 6 - Use of Interest Rate Derivatives in Securitization Transactions
      1. INTEREST RATE SWAPS
      2. CAPS AND FLOORS
      3. COUNTERPARTY RISK
      4. KEY POINTS OF THE CHAPTER
    5. CHAPTER 7 - Operational Issues in Securitization
      1. THE SERVICING FUNCTION
      2. TYPES OF SERVICERS
      3. SERVICER STRENGTHS
      4. SERVICER QUALITIES
      5. SERVICING TRANSITION
      6. BACKUP SERVICER
      7. REPORTING BY THE SERVICER
      8. ROLE OF TRUSTEES IN OPERATION OF THE TRANSACTION
      9. FRAUD RISK
      10. KEY POINTS OF THE CHAPTER
  9. PART Three - Review of ABS Collateral
    1. CHAPTER 8 - Collateral Classes in ABS: Retail Loans
      1. COLLATERAL CLASSES: BASIS OF CLASSIFICATION
      2. COLLATERAL CLASSES: MAIN TYPES
      3. CREDIT CARD RECEIVABLES
      4. AUTO LOAN SECURITIZATION
      5. KEY POINTS OF THE CHAPTER
    2. CHAPTER 9 - Asset-Backed Commercial Paper Conduits and Other Structured Vehicles
      1. TYPES OF ABCP CONDUITS
      2. TRADITIONAL SECURITIZATION AND ABCP
      3. ABCP COLLATERAL
      4. CREDIT ENHANCEMENT STRUCTURE
      5. LIQUIDITY SUPPORT
      6. PARTIES TO AN ABCP PROGRAM
      7. RATING OF ABCP CONDUITS
      8. KEY POINTS OF THE CHAPTER
    3. CHAPTER 10 - Securitization of Future Cash Flows: Future Revenues, Operating ...
      1. FUTURE REVENUES SECURITIZATION
      2. WHOLE BUSINESS OR OPERATING REVENUES SECURITIZATION
      3. SECURITIZATION OF INSURANCE PROFITS
      4. KEY POINTS OF THE CHAPTER
  10. PART Four - Collateralized Debt Obligations
    1. CHAPTER 11 - Introduction to Collateralized Debt Obligations
      1. WHY STUDY CDOs?
      2. TERMINOLOGY: CDO, CBO, CLO
      3. TYPES OF CDOs
      4. TYPICAL STRUCTURE OF A CDO
      5. BASIC ECONOMIC DRIVERS OF CDOs
      6. CDO MARKET AND THE HEALTH OF BANKING
      7. GROWTH OF THE CDO MARKET
      8. KEY POINTS OF THE CHAPTER
    2. CHAPTER 12 - Types of Collateralized Debt Obligations
      1. BALANCE SHEET CDOs
      2. ARBITRAGE CDOs
      3. RESECURITIZATION OR STRUCTURED FINANCE CDOs
      4. INDEX TRADES AND INDEX TRACKING CDOs
      5. KEY POINTS OF THE CHAPTER
    3. CHAPTER 13 - Structuring and Analysis of CDOs
      1. MEASURES OF POOL QUALITY
      2. ASSET AND INCOME COVERAGE TESTS
      3. RAMP-UP PERIOD
      4. THE CDO MANAGER
      5. INVESTING IN CDOs
      6. COLLATERAL AND STRUCTURAL RISKS IN CDO INVESTING
      7. KEY POINTS OF THE CHAPTER
  11. PART Five - Implications for Financial Markets
    1. CHAPTER 14 - Benefits of Securitization to Financial Markets and Economies
      1. SECURITIZATION AND FUNDING COSTS
      2. SECURITIZATION AND FINANCIAL INTERMEDIATION
      3. BENEFITS OF SECURITIZATION IN AN ECONOMY
      4. KEY POINTS OF THE CHAPTER
    2. CHAPTER 15 - Concerns with Securitization’s Impact on Financial Markets and Economies
      1. REDUCES THE EFFECTIVES OF MONETARY POLICY
      2. ADVERSE IMPACT ON BANKS
      3. LAX UNDERWRITING STANDARDS AND POORLY DESIGNED SECURITIES
      4. INCREASES OPAQUENESS OF BANK RISK
      5. KEY POINTS OF THE CHAPTER
  12. APPENDIX A - Basics of Credit Derivatives
  13. APPENDIX B - Valuing Mortgage-Backed and Asset-Backed Securities
  14. References
  15. Index