Role Of Securitization Research Articles

A Primer on the Role of Securitization in the Credit Market Crisis of 2007

In this paper I review the role of securitization in the credit markets and in particular the possible contribution of securitization to the credit crisis of 2007-2008. Based on this review I make the following observations: (i) over the last three decades the originate-to-distribute via securitization model has come to dominate the U.S. credit markets; (ii) the originate-to-distribute model has many possible advantages but brings with it a potentially fatal principal agent problem in the credit screening process; (iii) the growing complexity of the securitization process has given rise to a for lemons problem that may well have contributed to the collapse of the market for securitized issues; and (v) the collapse of the mortgage backed securities market resulted in the use of distress prices by financial institutions to mark-to-market their portfolios and this may well have contributed to the panic that resulted in the failure of the affected financial institutions.

The Great Subprime Meltdown of 2007

This article is a brief survey of the subprime mortgage market that existed in the United States from 2000 to 2007. It is a story of how a small, inconsequential part of the mortgage market grew into a monster large enough to shake the very foundations of the U.S. financial system. It9s a story with some elements that are old (all bull markets share common traits) and some that are new (credit default swaps, mezz CDOs, ABX, etc.) and it9s a story that is not over. The article discusses a “virtuous” cycle of rising home prices and “affordability” mortgage products, reasons the 2006 vintage of subprime mortgages are defaulting at higher rates than the 2005 vintage, the delayed response by banking regulators, programs to rescue subprime borrowers, the role of securitization in the growth of the subprime market, the lack of transparency of subprime securities and their Mezz CDO offshoots, and the spillover of the subprime problem to other markets. A “new” subprime industry is evolving from the ashes of the old, but its final shape is not yet known. We know that the industry that prevailed from 2000 to 2007 no longer exists, but we don9 know precisely what will take its place. It will be a much smaller industry (at least 50% smaller), it will consist of largely portfolio-based lending by large financial institutions and it will be mainly subprime loans that have few of the layered risk elements that came to dominate the industry in recent years. But as of this writing (September 2007) the industry is struggling to find the right type of loan that borrowers can afford and that will meet the new bank regulations. If and when subprime loans are securitized again, the new loans also will have to accommodate much tougher enhancement levels demanded by the rating agencies and be a product that investors will once again accept. Developing a product that meets all of those constraints will not be easy. <b>TOPICS:</b>Credit default swaps, project finance, credit risk management

The Role of Securitisation in the Capital Structure of Banks

This paper attempts to examine the role of securitisation in the capital structure of banks. Three aspects related to the issue of any security are analysed: first, the ex-ante characteristics of the banks choosing this funding source; second, the market reaction to the security issues announcement; and third, the ex-post characteristics of the issuing banks. The results indicate that banks with worse capital ratios, low quality assets and poor performance are more likely to use securitisation. It is also found that agency costs of managerial discretion play a role in explaining an identified negative market reaction to the securitisation issue and the subsequent bank investment behavior.

Adverse Selection, Licensing And The Role Of Securitization In Financial Market Evolution, Structure And Pricing

This paper models the structure of a financial market that is composed of two types of institutions, banks and securities or secondary markets. The model analyzes the development of the securities market as a way of trading off its lower cost of securitization with adverse selection due to asymmetric information possessed by banks, using a simple adverse selection model in the tradition of Akerlof (1970). Successive modifications, including licensing contracts similar to those of Leland (1979) and Chan and Leland (1982) solve some of the adverse selection problems by licensingloan sellers in an effort to provide minimum quality standards.

Asset Securitization and Optimal Asset Structure of the Firm

The process of asset securitization is a new and innovative financing method used for funding and risk management purposes. Evolved over the last few decades, securitization represents a substantial and established part of US and global capital markets. In addition to its importance as a financial and asset restructuring tool, securitization originated various streams of academic research. Different models have been developed in order to analyze the theoretical aspects of the process. But some important questions have remained unexplained. The established models don't address why the firm should securitize its assets. They don't investigate if securitization can be a viable alternative for the firm when it chooses its optimal corporate structure. We develop a model of the multi-asset firm which provides an answer to these questions. The model analyzes various corporate structures and validates asset securitization as one of the value maximizing options which can accomplish the optimal incorporation of the assets in the firm. In the framework of the model, the multi-asset firm can optimally choose between aggregating all the assets in one firm, securitizing a part of them through a securitization vehicle, or spinning them off into single-asset firms. For each structure, the debtholders and the equityholders choose the firm's optimal leverage ratio. The optimal asset and capital structure have an effect on the value of tax and non-debt bankruptcy claims. That phenomena leads to a potential increase in the overall value of the firm. For a specific set of the assets, securitization can be a preferred choice, because it avoids the costs associated with the standard bankruptcy procedure for the firm. The model provides a set of testable implications related to the optimal corporate and financial structure of the multi-asset firm and to the subsequent role of securitization.