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Asset Securitization: Theory and Practice

ISBN: 978-0-470-82603-4
256 pages
March 2011
Asset Securitization: Theory and Practice (0470826037) cover image
Asset Securitization is intended for beginners and market professionals alike who are interested in learning about asset securitization—its concepts and practices. It is designed so that the readers will come away with a fundamental but comprehensive understanding of the asset securitization market. As such, the book aims to provide a review of the market's development, necessary framework, potential benefits, and detailed descriptions of major asset securitization products.

Part I of the book, which consists of four chapters, will discuss the fundamental concepts, the funding efficiency, the market participants, and the potential benefits of asset securitization. An analysis of mortgage finance will be provided in Part II, which consists of six chapters that cover a variety of topics from the description of many different types of residential mortgages to the securitization of different types of residential mortgages, including the now infamous sub-prime mortgages. Also included are important topics, such as prepayments, cash flow structure, maturity and credit tranching, and the trading and relative value of the various mortgage-backed securities. The three chapters in Part III will explain the other major asset securitization products, such as commercial mortgage-backed securities, credit card receivable-backed securities, auto loan-backed securities, and collateralized bond obligations. Part IV has two chapters: one reviews the collapse and the potential recovery of the asset securitization market, and the other describes the asset securitization efforts in Japan, Australia, Taiwan, and China.

Extensive tables and charts are presented to help illustrate a concept or describe a product. Neither analytical discussions nor investment strategies of the various asset-backed securities are included as they are not the focus of this book.

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Preface.

Introduction.

Part One Basics of Asset Securitization.

Chapter 1 Asset Securitization: Concept and Market Development.

Basic Concept of Asset Securitization.

Development of the Asset Securitization Market in the United States.

Chapter 2 Originators and Investors of the Asset Securitization Market.

Efficient Financing for Originators with Asset Securitization.

Satisfying Varying Investor Demands with Asset Securitization.

Chapter 3 Intermediary Participants of the Asset Securitization Market.

Attorneys.

Accountants.

Guarantors and Credit Enhancers.

Credit Rating Agencies.

Investment Bankers.

Chapter 4 Necessary Ingredients and Benefits of Asset Securitization.

The Nine Necessary Ingredients.

Benefits of Asset Securitization.

Part Two Residential Mortgages and Securitization of Residential Mortgages.

Chapter 5 Residential Mortgages.

Description of a Residential Mortgages.

Characteristics of a Fixed-Rate Mortgage.

Alternative Mortgages.

Chapter 6 Residential Mortgage Market.

The Origination of a Residential Mortgages.

Mortgage Originators.

Mortgage Servicers.

Mortgage Insurers.

The Development of the Residential Mortgage Market.

Chapter 7 Residential Mortgage Pass-Through Securities.

Mortgage Pass-Throughs.

Concept and Terminology.

Trading and Relative Value of Pass-Throughs.

Chapter 8 Multiclass Mortgage Pass-Throughs.

Prepayment of Mortgage Pass-Throughs.

The Need for Multiclass Securities.

Collateralized Mortgage Obligations.

Real Estate Mortgage Investment Conduits.

Variety of REMIC Classes.

The Rise, Collapse, and Recovery of REMICS.

Trading and Relative Value.

Chapter 9 Private-Label Mortgage Pass-Throughs.

The Growth of the Private Label Pass-Throughs Market.

A Typical Transaction.

Credit Rating Criteria.

Performance of Credit Ratings.

Prepayment Pattern.

Trading and Relative Value.

Chapter 10 Subprime Mortgage-Backed Securities.

Evolution of the Subprime Mortgage Market.

Features of Home Equity Loans.

Varying Characteristics of Pools of Subprime Mortgages.

Examples of Transactions.

Unique Prepayment Pattern.

Performance of Credit Ratings.

Trading and Relative Value.

Part Three Securitizatin of Commercial Mortgages and Consumer Loans.

Chapter 11 Commercial Mortgage-Backed Securities.

The Growth of the CMBS Market.

The Origination of a Commercial Mortgage.

Defaults and Losses of Commercial Mortgages.

A Typical Transaction.

Performance of Credit Ratings.

Trading and Relative Value.

Chapter 12 Asset-Backed Securities.

The Growth of the ABS Market.

Credit Card ABS.

Auto Loan ABS.

Performance of Credit Ratings.

Trading and Relative Value.

Chapter 13 Collateralized Debt Obligations.

Basic Concept and Market Development of CDOs.

CDOs Are Not Mutual Funds.

Different Structural Types of CDOs.

Incentives for Investing in CDOs.

Structuring and Credit Ratings CDOs.

A Simulation Model to Structure CDOs.

Trading and Relative Value.

Part Four The Current Asset Securitization Market in the United States and Asia-Pacific.

Chapter 14 The Collapse and Recovery Prospects of the Asset Securitization Market.

How the Market Collapsed.

Prospects for Recovery.

Chapter 15 Asset Securitization in Asia-Pacific.

Asset Securitization in Japan.

Asset Securitization in Australia.

Different Patterns of Asset Securitization in Japan and Australia.

Asset Securitization in Taiwan.

Asset Securitization in China.

Appendix A Analysis of Prepayment and Prepayment Rate.

Appendix B Housing Price Appreciation and Mortgage Credit Performance.

Appendix C Fundamental Element in Credit Ratings.

Appendix D The Collapse of the Asset Securitization Market.

Index.

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Dr. Joseph C. Hu is professor of the International MBA Program at the National Chengchi University, Republic of China (Taiwan) and visiting professor at Hanqing Advanced Institute of Economics and Finance, Renmin University of China, People's Republic of China. Dr. Hu was formerly Standard & Poor's China country manager. He also served as Standard & Poor's global head of structured finance research.

Prior to Standard & Poor's, Dr. Hu held positions as managing director at Oppenheimer & Co. Inc., senior vice president at Nomura Securities International, Inc., executive vice president at Shearson Lehman Hutton Inc., senior vice president at E. F. Hutton Inc., and vice president at Salomon Brothers, Inc. He also worked as economist at Fannie Mae and taught as assistant economics professor at University of Maine. Dr. Hu is also the author of Basics of Mortgage-Backed Securities.

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 In Asset Securitization: Theory and Practice, Joseph Hu brings his unexcelled credentials to a critically needed description, explanation, and analysis of the huge and complex process of asset securitization. All too frequently securitization is seen from the perspective of one of its critical parts or processes, but rarely is there a full view of securitization as the complex industry that it, in fact, is. In spite of the enormity of the securitization industry, there are few experts having the knowledge and capability to see all the parts and processes individually and in sequential combination, that bring the only approach that allows full understanding of the "how's and why's" of securitization. No other approach is valid for public sector and private sector managers and policy-makers, all of whom should take Dr. Hu's new book as mandatory and standard-setting.
--Richard A. Dorfman, Managing Director, Head of Securitization,  The Securities Industry and Financial Markets Association (SIFMA)

Joseph Hu's new book Asset Securitization: Theory and Practice, is both timely and timeless. Dr. Hu delves into the history of securitization to show the promise and pitfalls of securitization. He describes the essential underpinnings of securitization and the fundamental features of a successful securitization program.  This fact and theory-filled book, from a pioneer of the market, should be essential reading for all those seeking to rebuild asset securitization on a firmer foundation.
--Andrew Davidson, President, Andrew Davidson & Company and Author, Securitization: Structuring and Investment Analysis

Asset Securitization is a well-written, important, and timely book. It is a comprehensive and detailed account of the role asset securitization plays in contributing to economic growth as well as creating problems when prudential practices are ignored. Nobody interested in understanding the basics of this remarkable financial innovation can afford not to read this book. Joseph Hu's practical expertise of how this market works comes through loud and clear.
--James R. Barth, Senior Finance Fellow, Milken Institute, Lowder Eminent Scholar in Finance, Auburn University

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