_7 Off Balance Sheet II Securitisation 2013 - OFF-BALANCE-SHEET BANKING II SECURITISATION AND LOAN SALES REFERENCES Greenbaum S.I and Thakor A.V 1995

_7 Off Balance Sheet II Securitisation 2013 -...

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OFF-BALANCE-SHEET BANKING II SECURITISATION AND LOAN SALES REFERENCESGreenbaum, S.I. and Thakor, A.V. 1995. Contemporary Financial Intermediation, Dryden. Chapter 8. Saunders, A. and Cornett, M.M., 2003. Financial Institutions Management - A Risk Management Approach, (4th ed). Irwin. Chapters 27 and 28. Lange, H. et al., 2013. Financial Institutions Management. (3rded). Sydney: McGraw Hill, Chapter 8. DECOMPOSITION OF THE LENDING FUNCTIONOrigination (including underwriting). Guaranteeing. Servicing. Funding. DIFFERENT TYPES OF SECURITISATION CONTRACTSA summary of mortgage- and asset-backed securities are attached. The summary has been reproduced from Saunders and Cornett (2003).
2PASS-THROUGHS (Mortgage-backed securities)- Bank places a pool of homogenous mortgaged loans in a trust. Removed from the balance sheet as an asset. - Bank seeks ‘credit enhancement’ –timing insurance of cashflows to bondholders from insurance company or government. - Trust sells debt securities (‘pass-through’ bonds to outside investors. - Bank receives proceeds from the sale of the bonds (thus replaces the mortgaged loans with cash on the balance sheet). - See diagram S&L (p. 439). - On an ongoing basis: - bank collects payments from mortgages and charges a service fee (eg. 40bpts). - credit enhancer charges insurance fee (eg. 60 bpts). - trustee pays a share of these payments minus fees to the bank and enhancer to each bondholder - The cashflows from the mortgages are dedicated to paying the bondholders. These payments include interest and principal, including prepayments of principal. Thus payments to bondholders increase if prepayments increase.
3Prepayments: Prepayment Frequency 0 4% -4% Fees (Y-r) Over life of bond: T Cashflow t No prepayments If current mortgage rate (Y) , => PV of remaining CF’s=> principal received earlier => prepayments reinvested at lower rates => future CF’sConsider impact of Y on bond value (figure S&L:477). Low Y first two effects dominate, high Y latter two effects dominate.
4Static Pool Pass-Throughs - loans in pool are long-term - pool is fixed prepayments passed through to investors immediately Dynamic Pool Pass-Throughs - loans in pool usually short term - when a loan matures, the proceeds are reinvested for a fixed period of time (the “revolving period”)

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