Benefits of Securitization
Securitization is a method that encompasses the pooling and transferring of the ownership of assets that generate cash flow, such as loans or receivables, to a special legal entity. This entity then offers securities, which are underpinned by these assets,…
Commercial Mortgage-backed Securities
CMBS are backed by a pool of commercial mortgages on diverse income-producing properties such as office buildings, multifamily properties, industrial properties, shopping centers, and health care facilities. These securities are repaid from the property’s generated revenue. They have collateral…
Residential Mortgage-backed Securities
Residential Mortgage-backed Securities (RMBS) are securities derived from the pooling of mortgages and their subsequent sale to investors. The section discusses the different types of RMBS, including mortgage pass-through securities, non-agency RMBS, and collateralized mortgage obligations. Mortgage Pass-through Securities Mortgage…
Residential Mortgage Loans
Mortgage Loans Mortgage loans are secured loans where repayments are linked to a specific real estate asset. The lending entity can take possession of this asset due to the rights provided by the first lien and security interest on the…
Prepayment Risk and Time Tranching
Prepayment Risk Prepayment risk pertains to the possibility that the borrower repays the principal differently than the agreed schedule. It includes two facets: contraction risk and extension risk. Borrowers might change their repayment patterns based on changing interest rates. In…
Collateralized Debt Obligations
Collateralized Debt Obligations (CDOs) are financial instruments issuing securities backed by diversified debt pools. These diversified pools can include corporate bonds, emerging market bonds, leveraged bank loans, and even other CDOs. Among them, the most common are Collateralized Loan Obligations…
Non-mortgage Asset-backed Securities
Non-mortgage asset-backed securities (ABS) encompass financial instruments collateralized by various non-mortgage assets. These include auto loans, credit card receivables, and personal loans. Amortizing vs. Non-Amortizing ABS Amortizing ABS is secured by loans like residential mortgages and auto loans, where periodic…
ABS Structures to Address Credit Risk
ABS inherently carries a high credit risk primarily due to the possibility of underlying borrowers defaulting on their obligations. This can significantly affect the returns for ABS holders. Therefore, structures within ABS are designed to address and mitigate these risks….
Covered Bonds
Covered bonds are priority debt instruments, meaning they have a higher claim on the issuing financial institution’s assets or income in case of liquidation. These bonds are unique because a separate pool of high-quality assets backs them. Typically, the assets…
The Securitization Process
Securitization is the financial practice of pooling various types of contractual debt like auto loans and selling their related cash flows to third party investors as securities, which are typically characteristic of a blend of both bonds and stocks. It…
