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AssetSec_CDS_Deriv

AssetSec_CDS_Deriv - Asset Securitization and Credit...

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Asset Securitization and Credit Derivatives Call Report / FR Y-C Items Tom Boemio September 2004 Anyone who isn’t confused really doesn’t understand the situation. Edward R. Murrow
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2 Asset Securitization The conversion of illiquid assets into securities . Illiquid assets (loans) are sorted into pools. Pools are then transformed into capital market instruments. Investors’ returns stem from the principal and interest cash flows from assets (loan payments). Hence the term Asset-Backed Securities
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3 Pooling of Assets Obligor 1 Obligor 2 Obligor 3 Obligor 4 Bank $100 Pool of Auto Loans $20 loan $30 loan $25 loan $25 loan Borrowers/Auto Buyers Investors in the capital markets $100 of Issued ABS
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4 SPE Funding To fund the purchase of assets, the SPE issues debt securities to investors   Investors SPE Bank $100 Assets $100 Cash $100 Securities $100 Cash
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5 Asset Securitization Types of Assets Securitized Residential Mortgages Through Government programs Private label Commercial Mortgages Credit Card Receivables Other Consumer Loans (e.g., Auto) Trade Receivables (ABCP programs) Commercial Loans
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6 Asset Securitization Mortgage-Backed Securities Outstandings in Billion of Dollars Private Year GNMA FHLMC FNMA Issues Total 1985 212.1 105.0 55.0 n/a 372.1 1990 403.6 321.0 299.8 53.3 1,077.7 1995 472.3 515.1 583.0 194.7 1,765.1 2000 610.5 822.3 1,057.8 499.8 2,944.3 2003-3Q 473.7 1,095.9 1,801.1 562.1* 3,932.8 Source: Federal Reserve Board Inside MBS and ABS * Estimate as of June 30, 2001
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7 Asset Securitization Asset-Backed Securities -Outstanding Amount 291.6 1071.8 1680.6 0 200 400 600 800 1000 1200 1400 1600 1800 1995 2000 2003-3Q M a n. H ousing Auto Loa ns H om e Equity Cre dit Ca rds T ota l B i l l i o n s
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8 Outstanding Bond Market Debt 22% 20% 19% 8% T re a sury Corpora te M BS & CM Os M one y M k t M unic ipa l Fe de ra l Age nc y ABS Total U.S. Debt Market $22.6 Trillion As of September 30, 2003 The Bond Market Association
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9 Asset Securitization Generic Structure Obligors Originator/ Sponsor/ Servicer Credit Enhancer Purchases credit protection Trust SPE SPE Investors Remit P&I Payments Issues Securities Cash Purchase of Securities Trustee Forwards Servicing Report & Payments Provides credit enhancement Transfers Transfers Loans Loans Cash Cash Forwards Payments
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10 Asset Securitization Transaction Participants Obligors  -- the borrowers of the funds (for autos, credit  cards, houses, i.e.,  you and me Originator/Sponsor  -- Provides the assets to be  securitized.  The sponsor owns or otherwise establishes  the issuer Trust  -- A special purpose entity that holds/acquires the  assets that are securitized and issues the securities  purchased in the capital market
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11 Asset Securitization Transaction Participants Servicer  -- Often the originator or sponsor.   Collects, for a fee, and transmits to investors the  interest and principal payments on the assets in  the underlying pool Typical servicing fee for credit card deals is  200 basis points Trustee  -- Monitors the Servicer’s  activities & protects investors’ interests.
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