Investment Analysis - Exam 2 Part 1

The financial crisis in the U.S but impacted the world, U.S policymakers had to work with global counterparts to:

1) establish central bank swap lines: to address money shortages

2) coordinate monetary policy: to send powerful messages to the market

3) arrange for IMF support: for emerging countries affected by crisis

What is securitization?

Banks pooling illiquid assets (often debts) into groups that are called reference portfolio’s

Portfolios are sold to an issuer who creates tradable securities with a stake in the assets. Investors but the new securities and become lenders.

Lenders can remove assets from their balance sheet to issue more loans. Investors profit on rate of return they are loaning out

Why do bank do securitization

• get cash now

• reduce risk (of people not paying them bank)

• make more loans (if they have more cash to loan out they can make more loans)

What are the types of MBS

1) Mortgage pass through: mortgage payments are collected and passed through to investors

2) collaterized mortgage obligation: multiple pools of securities

Residential MBS

MBS pass throughs backed by mortgages on residential property

Commercial MBS

MBS pass-throughs backed by mortgages on commercial property (properties used for business purposes)

Fixed rate mortgage

borrower pays the same interest rate for life of the loan

adjustable rate mortgage

rate is fixed on initial term but then fluctuates with market rates

agency MBS

MBS issued by Fannie and Freddie, Ginnie (any government owned or sponsored entity)

non-agency/ Private label MBS

MBS made by private entities (bank)

Payments on MBS

homeowners monthly payment include principle and interest. The principal is paid over the life of a security rather than repaid as a single payments

Maturity date on MBS

Maturity date is stated following schedule stated on the contract but is theoretical because is assumes there are no prepayments

Single security Initiative

effort to make a single, common type of MBS (Uniform MBS) to improve liquidity, reduce costs, and unify Enterprises securitization processes

Conforming Loans

Mortgage loans that conform to GSE guidelines

most known guideline is the size of the loan, also cannot loan to people with too much debt and not enough revenue

Loan to value ratio (LTV)

the value of a house should be much higher than what was lent out for it

Guarantee Fee (G-fee)

insurance of timely payment of principal and interest in MBS

Collaterized mortgage obligation (CMO)

MBS that divides $ collected from the mortgage into different groups (tranches). Investors can chose different tranches. Certain tranches are more secured and get paid back first while others are more risky and paid later.

The higher the risk, the higher the yeild