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The Securitization Markets Handbook: Structures and Dynamics of Mortgage - and Asset-Backed Securities

ISBN: 978-0-470-88484-3
352 pages
May 2010
The Securitization Markets Handbook: Structures and Dynamics of Mortgage - and Asset-Backed Securities (0470884843) cover image
In this long-awaited handbook, noted experts Charles Stone and Anne Zissu provide an enlightening overview of how securitization works and explain how future cash flows from various asset classes—from credit card receipts to mortgage payments—can be packaged into bond-like products and sold to investors.

Once a marginal source of funds, securitization is now an essential corporate funding technique widely adopted by financial and industrial companies throughout the world to finance both working capital and capital budgets. It is also used as a risk-management tool and a source of liquidity. Securitization has been adapted to fund corporate acquisitions, to capitalize future streams of revenue, and to liquidate pools of nonperforming loans. 

With examples from companies such as GE Capital, Ford Motor Credit, Countrywide Home Loans, and D&K Healthcare, The Securitization Markets Handbook provides descriptions of all major classes of asset-backed securities and offers a practice-oriented commentary on trends in securitization and the value of asset- and mortgage-backed securities across industries and throughout the global markets.

The authors approach the topic from both sides of the market: the supply side, where assets are securitized and mortgage- and asset-backed securities are issued, and the demand side, where investors choose which classes of mortgage and asset-backed securities will enhance their portfolios or serve as efficient hedges. The book’s detailed explanations and practical examples make it a valuable guide both for experienced money managers trying to put a securitization strategy into place and for those new to securitization looking to acquire a broad and strong foundation in the subject.
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List of Exhibits.
Acknowledgments.
Introduction.

Part One.
Key Structures and Cash Flow Dynamics.

1. Mortgage-Backed Securities.
Origins of the Market.
From the Primary to the Secondary Mortgage Market.
The Agency Market.
The Private-Label Market.
Agency and Nonagency Market Segments Compared.
Credit Risk Considerations.
 Mortgage and Funds Flow in the Secondary Market.
 Industry Illustration.
Pricing of Newly Originated Mortgages.
Freddie Mac Sample Purchase Pricing.
Mortgage Pricing from the Bank’s Perspective.

2. Price Dynamics of Mortgages and Cash Flows.
Bond and Mortgage Basics.
Bond Valuation.
Price/Yield Relationship.
Fixed-Rate Mortgages.
Prepayment Option.
Macauley and Modified Duration.
Convexity.
Risk Exposures.

3. Valuation of Mortgage- and Asset-Backed Securities.
Modeling Cash Flows of Pass-Through, PO, and IO Securities.
Information Set.
Cash Flow over Time.
Effective Duration.
Effective Convexity.
Case Study: A Pass-Through Security Issued by FNMA.
Prepayment Standard Assumption Levels.
S-Curve Prepayment Function.
Weighted Average Life and Different Spreads Measurements.
Spread I, Static Spread (Spread Z), and Spread S.
Option-Adjusted Spread.
Negative Option Cost.
Case Study: Principal-Only and Interest-Only Securities.
PO Strip.
IO Strip.

4. Other Structures in Asset-Backed Securities.
CMOs, PACs, Floaters, and Inverse Floaters.
Collateralized Mortgage Obligations.
Planned Amortization Class.
Floaters and Inverse Floaters.

Part Two. Corporate Debt and the Securitization Markets.

5. How Ford Motor Credit Corporation.
Has Used Securitization.
The Case of Ford Motor Credit.
Securitized Receivables.
Advantages of Securitization.
Special-Purpose Structure.
Allocating and Funding Credit Risk: Subordinate Classes.
and Residual Interests.
The Two-Step Securitization Transaction.
Credit Ratings and On-Balance-Sheet versus Off-Balance-Sheet.
Cost of Funding.
Ford Credit Auto Owner Trust 2000-A: A Case Study.
Waterfall of Cash Flows.
Credit Enhancement.
Overcollateralization.
Rating Agency Parameters.
Leveraging Credit Risk.

6. Asset-Backed Commercial Paper.
Why Companies Use Asset-Backed Commercial Paper Programs.
GE Capital Example.
Ford Motor Credit Example.
Countrywide Home Loans Example.
ABCP Characteristics.
Relationship of Conduit, Originator, and Seller.
Securitization Structure and Cash Flow.
Credit Enhancement and Liquidity Support.
Fully Supported versus Partially Supported.
Liquidity Facilities.
Cost of Funding.
Financier Conduit Hypothetical Example.
D&K Example.
GE Capital Example.
Labor Ready, Inc., Example.
Accounting Treatment.
Financial Interpretation.
Primary Beneficiary Status.
Risk-Based Capital Regulations.
Tier-One Leverage Ratio.
Conversion Factor for Liquidity Facilities.
Restructuring Possibilities.

Part Three.
Securitization of Revolving Credit.

7. Dealer Floor Plan Loans.
Trends in Wholesale Automobile Credit Securitization.
Basics of the Securitization Scheme.
Credit Enhancement.
Payment Phases.
Uncertain Maturity Date and Fluctuating Account Balance.
Considerations.
Securing Liquidity.
Shifts in Seller’s Interest and Investor Interest.
Seller’s Claim on Receivable Pool.
Factors in Credit Line Variability.
Pool Size Matters.

8. Credit Card Receivables.
Elements of a Master Trust Pooling and Servicing Agreement.
Basics of the Securitization Scheme.
Cash Flow Allocation.
Principal Collections and Reallocations.
Finance-Charge and Remaining Collections.
Case Study: MBNA Master Credit Card Trust II.
The Seller’s Interest and Investor Interest.
Retained Interest.
Accounting Treatment.
Sources of and Changes in Securitization Income.
Credit Risk and Credit Enhancement.
Case Study: MBNA Credit Card Master Note Trust.
Tranches for A, B, and C Classes.
ERISA Restrictions.

Part Four. Searching for Value in the Mortgage- and Asset-Backed Markets.

9. Investment, Speculation, and Hedging.
Target Investment.
Subordinate Segment of Private-Label MBSs.
Interest-Rate Risk.
Reinvestment of Cash Flow.
Interest-Only Strips as a Hedging Tool.
Combining Bonds and IOs.
Hedging FNMA 9.5 Percent Pass-Through Securities  with IO Securities.
Principal-Only Strips as a Hedging Tool.
Inverse Floaters as a Hedging Tool.
Hedging CMOs with Options on Treasury Bonds.

10. Credit Risk.
Direct Financing of Risk versus Buying a Financial Guaranty.
A Financial Guaranty Is Not an Insurance Contract.
Selecting Efficient Forms and Levels of Credit Enhancement.
Relative Value in Credit-Enhancement Structures.

Index.
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Charles A. Stone and Anne Zissu are the founding editors of The Financier (www.the-financier.com) and The Securitization Conduit (www.asset-backed.com), quarterly publications providing commentary on corporate finance, risk management, securitization, and related topics. Stone is visiting professor of finance at Université Paris Dauphine; Zissu is professor of finance at Temple University in Philadelphia. They have edited several books on finance, and their research has been published in leading academic journals. They reside in Philadelphia.
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