Tranche pool into different securities according to

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tranche pool into different securities according to prepayment risk - first tranche gets all prepayment until tranche is paid off - 1 st tranches typically have maturity less than 5 year - 2 nd tranches typically have maturity between 7-15 years - 3 rd tranches have maturity between 15-30 years Who participate in SECURITIZATION PROCESS? - Originator – (seller of collateral, originally own the asset and sell them to SPV) - Issuer - SPV – (creates a security backed by the asset and sell them to investors) - Investor - Credit enhancement, rating agencies, regulators, gov’t guarantees (these are 3 rd parties) Why do financial institutions participate? - Fund asset - Balance sheet management - Risk management and credit risk transfer Why are investors interested in these securities? - Diversification SPV or SPE (special purpose vehicle or entity) - Legal entity created by a firm by transfer asset to SPV to execute some purpose/transaction - SPV don’t make decision, rule governing tem are set in advance, no worker, no location Securitization Process – everything happens simultaneously or in differing order, depend on deal
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Credit enhancement – borrower provide additional collateral, insurance, or 3 rd party guarantee to lender to improve credit rating of note Ex. overcollateralization, margin, excess spread, pool insurance Performance Analysis for MBS - DSCR debt service coverage ratio - WAC weighted average coupon - WAM weighted average maturity - WAL weight average life - CPR constant prepayment rate - SMM single month mortality - PSA public securities association prepayment rate Benefit of securitization to Economy and Financial Market - Investor direct exposure to mortgage w/o intermediary like bank -
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