Issuers of other securitized products create safe assets (Non-Agency MBS, ABS, CLO, CDO) by holding, pooling and tranching of various debt.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 19 Structure All (private label) securitization vehicles have a similar structure and sophisticated supporting infrastructure. This suggests that investors are aware of conflict of interests. The following participants are involved.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 20 Source: FRBNY (2012)
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 21 Issuer (sponsor or originator) Issuer brings together the collateral assets for the asset-backed security. Issuer is often the lender or loan originator of the portfolio of securitized assets (mortgages, loans) that back the asset backed security. Assets are pooled together and sold to an external legal entity, a special purpose vehicle (SPV). The SPV buys the assets from the issuer with funds raised from the buyers of the security tranches issued by the SPV (later).
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 22 SPV and master trust The transfer of the assets to the SPV has the legal implication of obtaining a true sale opinion that removes issuer ownership and insulates asset-backed investors in the event of an issuer bankruptcy. The SPV often transfers the assets to another special-purpose entity, typically a master trust. This second entity actually issues the security shares backed by those assets under GAAP sale rules outlined in the Financial Accounting Standards Board’s Statement No. 125.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 23 Underwriter The role of underwriters in structured finance is similar to that in other methods of securities issuance. MBS and ABS underwriters fulfill traditional arranger roles of representing the issuer (here, the SPV or trust). The primary job of the underwriter is to analyze investor demand and design the structure of the security tranches accordingly. Underwriters also provide liquidity support in the secondary trading market by facilitating trades.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 24 Trustee The trustee represents the interests of the certificate holders and acts as administrator of the trust. The primary role of the trustee is to compute the amount of monthly distributions payable to the investors and make appropriate distributions. Each month, an account statement is prepared by the trustee that summarizes the cash received by the trust and explains the calculation of the amounts paid to the investors of each class of securities. The trustee is usually responsible for the preparation of the trust’ s income tax return and the related informational tax filings.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 25 Remark The top four trustees in MBS and home equity products are BNY Mellon, Deutsche Bank Trust, U.S. Bank National Association, and Wells Fargo.
Money and Banking, Tri Vi Dang, Columbia University, Spring 2020 26 Servicer
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