Asset Backed Bonds Flashcards
What are three parties involved in securitization transaction?
Seller - originates loan, sells to issuer
Issuer - buys loans from seller
Servicer - services original loans
What is an asset backed security (ABS)
Backed by pools of loans or receivables other than primary mortgages
Can be amortizing or non amortizing
What is prepayment trenching or time trenching
Divide into tranches to distribute prepayment risk - like MBS
Credit tranching
Shift credit risk to subordinated bonds, absorb losses up to par value first, then senior tranches absorb losses
What are two forms of credit enhancements and examples of types
External credit enhancements - corp guarantees - letters of credit - bond insurance Internal credit enhancements - reserve funds - overcollateralization - senior vs. sub debt
What are 6 types/classes of ABS
Closed end home equity loans (HEL) Manufactured housing ABS Auto loan-backed securities Student loan ABS SBA loan-backed securities Credit card receivables ABS
What are closed end home equity loans
Secondary mortgages - fixed rate, fully amortizing
Diff prepayment pattern due to diff borrower traits
What is manufactured housing ABS
Backed by loans for manufactured homes
Stable - less sensitive to refinancing due to smaller loan balances, significant depreciation on value, low credit ratings
Auto loan backed securities
Backed by loans for automobiles
36-72 month maturities
Issued by fin subsidiaries of auto makers
Prepayments via sales/trade ins, repo, insurance etc
Low refinancing - high dep rate
Student loan ABS
Securitized by loans under gov’t
Prepayments from default or consolidation
SBA loan backed securities
Backed by pools of SBA loans
Var rate, reset quarterly or monthly on prime
Credit card receivables ABS
Backed by pools of receivables owed by banks, retailers, travel/entertainment companies, etc.
CF includes finance charges, annual fees, principal repayments
Balances are revolving - principal not amortized
Collateralized debt obligations
Collateralized by pool of debt obligations such as
- corp bonds
- MBS and ABS
- bond issues in emerging mkts
- corp loans, distressed debt, etc
Cash CDOs can be driven by ______ and _______
Arbitrage - spread between collateral return and funding costs
Balance sheet - remove assets from BS
What is Synthetic CDO and advantages
Bondholders take on risks of underlying assets but not ownership
Advantages are senior section doesn’t need funding, shorter ramp up, cheaper to get exposure
