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• Securitization

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Debt - Securitization markets

1 This protects investors from a degree of risk, making the securitization more attractive

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Dodd–Frank Wall Street Reform and Consumer Protection Act - Subtitle D – Improvements to the Asset-Backed Securitization Process

1 * help ensure high quality underwriting standards for the

securitizers and originators of assets that are securitized or available for

securitization

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Tobacco Master Settlement Agreement - Securitization

1 They are a form of securitization

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Mortgage-backed security - Securitization

1 The process of securitization is complicated and depends greatly on the jurisdiction within which the process is

conducted. Among other things, securitization distributes risk and permits

investors to choose different levels of investment and risk.Lemke, Lins and Picard, Mortgage-Backed Securities,

Chapter 1 (Thomson West, 2013 ed.). The basics are:

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Mortgage-backed security - Securitization

1 These securitization trusts may be structured by government-sponsored

enterprises as well as by private entities that may offer credit

enhancement features to mitigate the risk of prepayment and default associated with these mortgages

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Mortgage-backed security - Securitization

1 In the United States, the most common securitization trusts are

sponsored by Fannie Mae and Freddie Mac, US government-sponsored

enterprises

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Structured finance - Securitization

1 Securitization is the method utilized by participants of structured finance to create the pools of assets that are

used in the creation of the end product financial instruments.

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Securitization

1 'Securitization' is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages,

auto loans or credit card debt obligations and selling said

consolidated debt as bonds, pass-through securities, or collateralized

mortgage obligation (CMOs), to various investors

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Securitization

1 subprime mortgage crisis.Michael Simkovic,

[http://ssrn.com/abstract=1924831 Competition and Crisis in Mortgage

Securitization]

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Securitization

1 Off-balance sheet securitizations are believed to have played a large role

in the high leverage level of U.S

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Securitization

1 Hill, [http://papers.ssrn.com/sol3/papers.c

fm?abstract_id=333008 Whole Business Securitization in Emerging

Markets], Duke Journal of Comparative and International Law

12:2 (2002).

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Securitization - History

1 Examples of securitization can be found at least as far back as the 18th century.[http://www.nber.org/chapter

s/c12795.pdf Dutch Securities for American Land Speculation in the

Late-Eighteenth Century], Rik Frehen, K

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Securitization - History

1 In February 1970, the U.S. Department of Housing and Urban Development created

the first modern residential mortgage-backed security. The Government National Mortgage Association (GNMA or Ginnie Mae)

sold securities backed by a portfolio of mortgage loans.Asset-Backed securities in

Germany: the sale and Securitization of loans by German credit institutions,

Deutsche Bundesbank Monthly Report July, 1997.

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Securitization - History

1 A pool of assets second only to mortgages in volume, auto loans were a good match for structured finance; their maturities,

considerably shorter than those of mortgages, made the timing of cash flows more predictable, and their long statistical

histories of performance gave investors confidence.Asset Securitization

Comptroller's Handbook, Comptroller of the Currency Administrator of National Banks,

1997https://store.theartofservice.com/the-securitization-toolkit.html

Securitization - History

1 This early auto loan deal was a $60 million securitization originated by

Marine Midland Bank and securitised in 1985 by the Certificate for

Automobile Receivables Trust (CARS, 1985-1).Hearing before the U.S. House subcommittee on Policy

Research and Insurance in “Asset Securitization and Secondary

Markets” (July 31, 1991), page 13 https://store.theartofservice.com/the-securitization-toolkit.html

Securitization - History

1 Key areas of activity in the broad area of Alternative Risk Transfer include catastrophe bonds, Life

Insurance Securitization and Reinsurance Sidecars.

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Securitization - History

1 The first public Securitization of Community Reinvestment Act (CRA) loans started in 1997. CRA loans are loans targeted to low and moderate

income borrowers and neighborhoods.[http://www.wachovia.com/inside/page/textonly/0,,134_307

%5E306,00.html Wachovia Press Releases]

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Securitization - History

1 Modern securitization took off in the late 1990s or early 2000s, thanks to the

innovative structures implemented across the asset classes, such as UK Mortgage

Master Trusts (concept imported from the US Credit Cards), Insurance-backed transaction

(such as the ones implemented by the insurance securitization guru Emmanuel Issanchou) or even more esoteric asset

classes (for example securitization of lottery receivables).

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Securitization - History

1 Done Deal: The First Securitization Of Rooftop Solar Assets Forbes - URL:

http://www.forbes.com/sites/uciliawang/2013/11/21/done-deal-the-first-

securitization-of-rooftop-solar-assets/

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Securitization - Credit enhancement and tranching

1 Some securitizations use external credit enhancement provided by

third parties, such as surety bonds and parental guaranty|guarantees

(although this may introduce a conflict of interest).

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Securitization - Repayment structures

1 Fully amortizing securitizations are generally collateralised by fully amortizing assets such as home

equity loans, auto loans, and student loans

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Securitization - Repayment structures

1 After a predetermined “revolving” period, during which only interest

payments are made, these securitizations attempt to return

principal to investors in a series of defined periodic payments, usually

within a year

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Securitization - Repayment structures

1 The most common bullet structure is called the 'soft bullet', meaning that

the final bullet payment is not guaranteed on the expected maturity date; however, the majority of these

securitizations are paid on time

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Securitization - Repayment structures

1 Securitizations are often structured as a sequential pay bond, paid off in a sequential manner based on maturity. This means that

the first tranche, which may have a one-year average life, will receive all principal

payments until it is retired; then the second tranche begins to receive principal, and so

forth. Pro rata bond structures pay each tranche a proportionate share of principal

throughout the life of the security.

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Securitization - Structural risks and misincentives

1 Originators (e.g. of mortgages) have less incentive towards credit quality and greater incentive towards loan volume since they do not bear the long-term risk of the assets they

have created and may simply profit by the fees associated with

origination and securitization.

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Securitization - Master trust

1 A second risk is that the total investor interests and the seller's interest are

limited to receivables generated by the credit cards, but the seller (originator)

owns the accounts. This can cause issues with how the seller controls the terms and conditions of the accounts.

Typically to solve this, there is language written into the securitization to protect the investors and potential receivables.

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Securitization - Grantor trust

1 Grantor trusts are very similar to pass-through trusts used in the earlier days of

securitization

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Securitization - Advantages to issuer

1 'Reduces funding costs': Through securitization, a company rated BB

but with AAA worthy cash flow would be able to borrow at possibly AAA

rates

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Securitization - Advantages to issuer

1 'Reduces asset-liability mismatch': Depending on the structure chosen,

securitization can offer perfect matched funding by eliminating

funding exposure in terms of both bond duration|duration and pricing

basis.The Handbook of Asset-Backed Securities, Jess Lederman, 1990. Essentially, in most banks and

finance companies, the liability book or the funding is from borrowings. This often comes at a high cost.

Securitization allows such banks and finance companies to create a self-

funded asset book.

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Securitization - Advantages to issuer

1 Two good examples of this are catastrophe bonds and Entertainment Securitizations

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Securitization - Advantages to issuer

1 When a securitization takes place, there often is a true sale that takes place between the Originator (the

parent company) and the SPE

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Securitization - Advantages to issuer

1 'Admissibility': Future cashflows may not get full credit in a company's

accounts (life insurance companies, for example, may not always get full

credit for future surpluses in their regulatory balance sheet), and a securitization effectively turns an

admissible future surplus flow into an admissible immediate cash asset.

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Securitization - Disadvantages to issuer

1 'Costs': Securitizations are expensive due to management and system

costs, legal fees, underwriting fees, rating fees and ongoing

administration. An allowance for unforeseen costs is usually essential in securitizations, especially if it is an

atypical securitization.

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Securitization - Disadvantages to issuer

1 'Size limitations': Securitizations often require large scale structuring, and thus may not be cost-efficient for

small and medium transactions.

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Securitization - Disadvantages to issuer

1 'Risks': Since securitization is a structured transaction, it may include

par structures as well as credit enhancements that are subject to

risks of impairment, such as prepayment, as well as credit loss,

especially for structures where there are some retained strips.

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Securitization - Advantages to investors

1 'Opportunity to invest in a specific pool of high quality assets': Due to

the stringent requirements for corporations (for example) to attain

high ratings, there is a dearth of highly rated entities that exist.

Securitizations, however, allow for the creation of large quantities of

AAA, AA or A rated bonds, and risk averse institutional investors, or

investors that are required to invest in only highly rated assets, have

access to a larger pool of investment options.

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Securitization - Advantages to investors

1 'Portfolio (finance)|Portfolio Diversification (finance)|

diversification': Depending on the securitization, hedge funds as well as other institutional investors tend to

like investing in bonds created through securitizations because they may be uncorrelated to their other

bonds and securities.

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Securitization - Advantages to investors

1 'Isolation of credit risk from the parent entity': Since the assets that are securitized are isolated (at least

in theory) from the assets of the originating entity, under

securitization it may be possible for the securitization to receive a higher

credit rating than the parent, because the underlying risks are

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Securitization - Risks to investors

1 However, the credit crisis of 2007–2008 has exposed a potential flaw in

the securitization process – loan originators retain no residual risk for

the loans they make, but collect substantial fees on loan issuance and

securitization, which doesn't encourage improvement of

underwriting standards.

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Securitization - Risks to investors

1 'Moral hazard': Investors usually rely on the deal manager to price the securitizations’ underlying

assets. If the manager earns fees based on performance, there may be a temptation to mark up the prices of the portfolio assets.

Conflicts of interest can also arise with senior note holders when the manager has a claim on the deal's excess spread.Tavakoli, Janet. CDOs: Caveat Emptor GARP Risk Review (Journal of the Global Association of Risk Professionals),

September/October 2005 Issue 26.

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Securitization - Recent lawsuits

1 Recently there have been several lawsuits attributable to the rating of securitizations

by the three leading rating agencies. In July, 2009, the USA’s largest public pension fund

has filed suit in California state court in connection with $1 billion in losses that it says were caused by “wildly inaccurate”

credit ratings from the three leading ratings agencies.[http://www.nytimes.com/2009/07/

15/business/15calpers.html?_r=2scp=1sq=calpersst=cse]

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Special purpose vehicle - Securitization

1 * A Real Estate Mortgage Investment Conduit (REMIC), used for the pooling and securitization of mortgage loans

for Mortgage-backed security|mortgage-backed securities.

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Special purpose vehicle - Securitization

1 * A financial asset securitization investment trust (FASIT), a defunct entity used for securitization of any

debt for Asset-backed security|asset-backed securities.

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Asset-backed security - Securitization

1 Securitization is the process of creating asset-backed securities by transferring assets

from the issuing company to a bankruptcy remote entity. Credit enhancement is an integral component of this process as it

creates a security that has a higher rating than the issuing company, which allows the

issuing company to monetize its assets while paying a lower rate of interest than would be

possible via a secured bank loan or debt issuance by the issuing company.

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Securitization transaction

1 'Securitization' is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages,

auto loans or credit card debt obligations and selling said

consolidated debt as bond (finance)|bonds, pass-through securities, or collateralized mortgage obligation

(CMOs), to various investorshttps://store.theartofservice.com/the-securitization-toolkit.html

Securitization transaction

1 Hill, [http://papers.ssrn.com/sol3/papers.c

fm?abstract_id=333008 Whole Business Securitization in Emerging

Markets], Duke Journal of Comparative and International Law

12:2 (2002).

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Securitization transaction - Structural risks and misincentives

1 Some originators (e.g. of mortgages) have prioritised loan volume over credit quality,

disregarding the long-term risk of the assets they have created in their enthusiasm to

profit from the fees associated with origination and securitization. Other

originators, aware of the reputational harm and added expense if risky loans are subject

to repurchase requests or improperly originated loans lead to litigation, have paid

more attention to credit quality.

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Securitization (international relations)

1 Securitization studies aims to understand who securitizes

(Securitizing actor), on what issues (threats), for whom (referent object), why, with what results, and not least, under what conditions.Barry Buzan,

Ole Wæver, and Jaap de Wilde, Security: A New Framework for

Analysis (Boulder: Lynne Rienner Publishers, 1998), p

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Securitization (international relations)

1 Basic Components of a securitization

act:

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Securitization (international relations)

1 * Audience: the target of the securitization act that needs to be

persuaded and accept the issue as a security threat.

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Securitization (international relations)

1 In Security: A New Framework for Analysis, Barry Buzan, Ole Wæver and Jaap de Wilde work with five

political sectors in which a securitization could take place:

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Securitization (international relations)

1 However, a securitization could easily involve more than one of these sectors

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Securitization (international relations)

1 Many critical security scholars, especially since 9/11, have used the term 'securitization' without giving proper credit to the Copenhagen

School.

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Debts - Securitization trusts

1 Securitization occurs when a company sells a pool of assets to a

securitization trust, and the securitization trust finances its

purchase of the assets by selling Security_(finance)#Debt|securities to

the market

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Celebrity bond - Other artist rights securitization

1 The securitization of the collections of other artists, such as James Brown,

Ashford Simpson and the Isley Brothers, later followed.

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