Securitisation is the process of converting a pool of cash flows into tradeable securities known as asset backed securities (ABS) or Mortgage backed securities (MBS).
An originator of cash flows (e.g. loans) sells a portfolio of loans to a special-purpose vehicle (SPV). The SPV raises funds to purchase the loans by issuing debt securities to investors.
The interest and principal payments on the underlying loans are used to make the interest and principal payments on the securities.
There are a diverse range of participants including:
The Australian securitisation market has enjoyed rapid growth over the last 10 to 12 years. The size of the market, based on the value of securities outstanding by Australian securitisation vehicles, has increased from $10billion in March 1995 to over $200billion by the end of 2006.
Through the growth in the securitisations of residential mortgages. Securitised residential mortgages have increased from $5 billion to $116 billion and currently account for 70 per cent of the assets of Australian securitisation vehicles.
The changing composition of the mortgage market: the increase of specialist mortgage originators and securitisations becoming an attractive financing option with deal costs decreasing.
Since 2000, more than half the bonds issued domestically by Australian entities have been asset backed bonds, while a quarter of offshore issuance has been of asset backed bonds.
Commercial mortgages, trade receivables, other loans and asset backed bonds have also increased in recent years; they have done so at a slower pace and from a much lower level.
Special purpose trust: when assets are transferred to a trustee. The trustee holds the assets pursuant to the terms of a trust deed.
Special purpose companies: solely for the purpose of acquiring and funding securitisable assets.
When the securities issued by the SPV are redeemed as and when the underlying cash flows are received. This is most often done through the working of a pass through or pay through provision.
It is the lender.
In almost all securitisations, the originator is obliged under the terms of the securitisation to administer the securitised asset on behalf of investors. In this capacity, the originator also acts as a servicer.
To insulate investors from losses on the underlying cash flows. Credit enhancement raises the credit quality of a portfolio of assets.
External: third party makes up losses. Asset level or deal level. Three types: Lenders Mortgage Insurance (LMI), letter of credit, wrap around guarantee
Internal: subordination, over collateralisation, excess servicing margin
Liquid facilities: cash available to ensure payments on bonds is timely
Guaranteed investment contracts (GICs): Guarantees a minimum rate of return on any cash the SPV holds.
Swaps: convert earnings on underlying assets to the assets to the same basis as the bonds.
Cross currency swaps: exchanges AUD into other currencies.
Determine how much principal and interest borrowers are likely to repay, to a level of certainly consistent with the particular rating category.
The credit quality of the collateral by looking at:
