Securitisation

Question 1

what is securitisation?

Answer 1

selling loans to hedge against interest rate risk

Question 2

what are three major forms of securitisation?

Answer 2

Pass-through sec (PTS)
Collateralised Mortgage Obligations (CMO)
Mortgage backed bonds (MBB)

Question 3

what are the main benefits of securitisation? (6)

Answer 3

• reduces/diversifies credit risk exposure
• manages i rate risk
• turns illiquid assets into liquid assets
• provides alternative source of funding
• reduces regulatory tax
• adds fee based income

Question 4

describe Pass-through securities (PTS)

Answer 4

banks sells loan to investors

investor recieve an equal share of any cash flows on a pooled loan.

Question 5

describe Collateralised Mortgage Obligations (CMO)

Answer 5

packaging and selling whole mortage loans or grouping PTSs in a trust.
sequential CMOs, all cashflows flow to the classes in alphabetical order until they are paid off, ie A class has the shortest life, followed by B and then C.
Therefore the most risk (default) lies with C, then B and lastly A

Question 6

describe Mortgage backed bonds (MBB)

Answer 6

MBBs are collateralised by pool of assets. MBB bondholders have first claim to an FIs mortgage assets in cases of financial distress.
They differ from PTS and CMOs because:
remain on balance sheet
no direct link of CFs between collat mortgages and bonds.

Question 7

what are weakness of MBB

Answer 7

illiquidity
over collateralisation
cap adequecy implications