PREPAYMENT ANALYSIS OF RESIDENTIAL MORTGAGE BACKED SECURITIES FOR INDIAN SECURITIZATION MARKET .pdf

PREPAYMENT ANALYSIS OF RESIDENTIAL MORTGAGE BACKED SECURITIES FOR INDIAN SECURITIZATION MARKET .pdf

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PREPAYMENT ANALYSIS OF RESIDENTIAL MORTGAGE BACKED SECURITIES FOR INDIAN SECURITIZATION MARKET K.C. Iyer 1 G.C. Tripathi 2 ABSTRACT Residential Mortgage Backed Securities are gaining momentum in India, as the same are likely to be listed and traded in public domain. This has prompted the analysis of different aspects of pricing its products. Various risk elements control the prices of these products and prepayment is one of the most critical of them. This paper attempts to identify and analyze two factors i.e seasonality and seasoning, contributing to the prepayment risk associated with the residential mortgage backed securities in Indian market where the underlying asset is based on retail housing loans to the individuals in India. The data collected pertained to existing pools securitized in recent past. Unlike the pattern observed in the developed economies, this study indicates that the prepayment does not significantly change in different months or seasons of a year. However, the ageing of pools (seasoning) has significant impact on prepayments, which is in consonance with the developed economies. The prepayments have shown a declining trend with age. Key Words : Prepayment, Securitized Instruments, Residential Mortgage Backed Securitization 1. Introduction Securitization is a process, which infuses efficiency in the distribution of capital of an economy. It generates channels for capital market funds to such sectors where funds are required the most and this has led to innovative instruments like ‘Pass Through Certificates’ (PTC) and ‘Pay Through Certificates’. These are based on mortgage-backed securitization (MBS), or asset backed securitization (ABS), or collateralized debt obligations (CDO). These 1 Associate Professor, Department of Management Studies, Indian Institute of Technology, Delhi (India) - 110016. Ph: +91 11 26591209; Fax: +91 11 26862820 E-mail: [email protected]ms.iitd.ac.in 2 Doctoral Student, Department of Management Studies, Indian Institute of Technology, Delhi (India) - 110016. Ph: +91 9811460746; Fax: +91 11 26862820 E-mail: [email protected]
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instruments have a vital role in real estate and infrastructure sectors of economy and have therefore been gaining popularity among institutional investors. Securitization process started as early as in 1990 in India, but it remained almost dormant for almost a decade. However, this process evidenced considerable activity in the last six years, particularly in the area of asset backed securitization where car loans and personal loans have been securitized by a number of lending institutions (Kothari, 2006). This has led to increased interest and awareness among various stakeholders of this process. The volume in the primary market of securitized instruments has increased from 36 Billion Indian Rupees (INR) to 260 Billion INR in the four years from 2002 to 2006 marking an increase by almost 725%. Even here the other modes of securitization such as MBS and CDO could not see so much of growth primarily due to absence of policy framework in place pending legal clearance on Securitization Act, 2002 and thereby lack of confidence in the minds of investors. Besides,
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