Securitizing Mortgages

Mortgage-backed bonds not issued by government agencies are rated in the same way as other corporations. Some nongovernment agencies obtain mortgage insurance for their issues, to boost their credit quality. The credit rating of the insurer then becomes an important factor in the 

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In addition to the more traditional cash flows from mortgages and loan assets, investment banks underwrite bonds secured with flows received by leisure and recreational facilities, such as health clubs, and other entities, such as nursing homes. Bonds securitizing mortgages are usually treated as a separate class, termed mortgage-backed securities, or MBSs. Those with other underlying assets are known as asset-backed securities, or ABSs. The type of asset class backing a securitized bond issue determines the method used to analyze and value it. 

The mark-to-market accounting rules accelerated the problem by creating a downward spiral of asset values as the secondary market dried up. Banks had to mark ABS assets at the market price, unconnected with the default performance of the underlying portfolios however, in a flight-to-quality environment, all structured credit products became impossible to trade in the secondary market, so values were marked down almost daily, in some cases down to virtually zero. The price of many securitized mortgage pools is well below their value now. The accounting rules force banks to take artificial hits to their capital without taking into account the actual performance of the pool of loans. 

Pratt left the agency in May 1983 to become the president of the branch of Merrill Lynch that brokered and securitized mortgages. President Reagan filled... 

The flexibility of securitization is a key advantage for both issuers and investors. Financial-engineering techniques employed by investment banks today enable bonds to be created from any type of cash flow. The most typical such flows are those generated by high-volume loans such as residential mortgages and car and credit card loans, which are recorded as assets on bank or financial-house balance sheets. In a securitization, the loan assets are packaged together, and their interest payments are used to service the new bond issue. 

ACE Securities series 2004 is a sub-prime RMBS transaction that closed in the U.S. market in January 2004. It is a securitization of a pool of sub-prime mortgages originally on the balance sheet of Fremont Investment and Loan. Fremont is a commercial banking institution that had been engaged in sub-prime mortgage lending for more than ten years prior to the transaction, and also originated previous home equity securitization deals. 

The driving force behind securitization has been the need for banks to realize value from the assets on their balance sheet. Typically, these assets are residential mortgages, corporate loans, and retail loans such as credit card debt. Let us consider the factors that might lead a financial institution to securitize a part of its balance sheet. These might be for the following reasons ... 

Government-chartered corporation that buys qualified mortgage loans from the financial institutions that originate them, securitizes the loans, and distributes the securities through the dealer community. The securities are not backed by the U.S. government. The market value of these securities prior to maturity is not guaranteed and will fluctuate. 

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