SECURITIZATION

1
SECURITIZATION

• Pooling and repackaging of loans for resale as
  marketable securities to be sold to investors

2
TYPES

• Pass-throughs
• Mortgage- backed Bonds
• Collateralized Mortgage Obligations

3
PASS-THROUGHs

• Portfolio of similar
• loans is place in trust
• management
• the Middle operates on the portfolio
• Certificates of ownership are sold to investors
• Loan originator collects payments
• Service fee is deducted
• Remainder is passed to investors

4
Middle GINNIE MAE GNMA

• Two functions
• Sponsorship of programs
• Timing insurance

• Is the loan package on the balance sheet?
• YES--Borrower (is a claim against the borrower)
• NO--the Financial Institution
• NO--GNMA
• YES--Investor (is an asset for the investor)

5
GNMA pass- through
Bank creates mortgages
Sale proceeds from GNMA bonds go to the bank
FHA/VA/FMHA mortgage credit insurance
Mortgages are placed in trust off the balance
sheet
Outside investors purchase the bonds
GNMA provides timing insurance of cash flows to
bondholders
GNMA creates the bonds
6
Middle FANNIE MAE FNMA

• Three functions
• Purchases packages of loans sells these MBSs
  (Mortgage Backed Securities) to investors
• Timing insurance
• Swap facilitator

• Is the loan package on the balance sheet?
• YES--Borrower
• YES--Financial Institution (holds a package of
  loans asset)
• YES--FNMA (loans and packages as assets bonds
  for financing of assets are sold to investors)
• YES--Investor (is an asset for the investor)

7
MORTGAGE-BACKED BONDS

• Financial institution segregates a group of
  mortgage loans and pledges the loans as
  collateral
• Secured bonds are sold to investors
• Mortgage payments do not flow through to the bond
  investors
• Bank pays promised interest and principal to the
  bond holders from general income, not mortgages
  specifically

8
MBBs, cont

• Bonds are over-collateralized
• Bonds are rated separately from the financial
  institution
• Bond term to maturity is fixed, not dependent on
  expected payoff patterns of the underlying
  mortgages

9
CMO

• Collateralized Mortgage Obligation
• Mortgages and pass-through securities are placed
  in trust, off the balance sheet
• They are then torn-apart, pieces repackaged
• Packages are sold to new owners--double
  securitization!
• Investors will pay a higher price for securities
  exactly matching their needs

10
CMO, cont

• Classes of investors tranches
• Up to 17 classes, based on prepayment priority
• Interest paid as contracted for each tranche
• Prepayment of principal used to retire the
  tranches, from lowest interest rate to highest
• Two special tranches

11
Two special tranches . . .

• Class Z
• Interest accrues till all other classes are
  retired
• Pmt 3
• Pmt 2 Interest
• Pmt 1 Interest Accrual
• Interest Accrual
• Accrual

• Class R
• Collects reinvestment income earned and residual
  collateral

12
CMO Creation STEP 1
Financial Institution Creates and
Packages Mortgages
GNMA creates a Pass-Through Owned by Financial
Institution
Investment Banker Buys the Package from Financial
Institution
Cash is paid to the Financial Institution
13
CMO Creation STEP 2
Investment Banker Buys the Package from Financial
Institution
Outside investors purchase bonds Cash paid to
Investment Banker
Mortgages, Pass-throughs are put into Trust
by Investment Banker
Tranche A
Tranche B
. . .
Trust issues new bonds with pass-throughs as
collateral