Author Topic: What is a securitization aka toxic asset  (Read 1855 times)

Offline Dan

  • Moderator
  • Hero Member
  • *****
  • Posts: 3086
What is a securitization aka toxic asset
« on: October 14, 2011, 07:46:53 AM »
A securitization is a special purpose business entity (generally either a trust but in rare instances also a partnership) that is set up to provide long term, off balance sheet financing.
 
Mortgages are what securitizations are most famous for financing but you can really put anything with a payment stream into a securitization. Home loans, commercial loans, lottery payments, medical payments, etc. You can even use something called a master trust to finance very short term items such as trade receivables and credit card balances.
 
The way it worked in a mortgage envirornment was that an originator financed his day to day loan originations with a dedicated line of credit called a warehouse line. This line may be for 50 million or it may be worth 700 million. But eventually it will fill up and then what does the lender do? In the old days they would sell these loans to Fannie Mae at a premium. They may get 102 for a mortgage they originated. So if we are talking about a 200,000 mortgage then they would make a 4,000 profit on the sale of the loan and net that against their costs. Commissions to sales people, office staff, etc. It was a pretty clean business model and you knew where you stood. The only hangups were that you could only originate a loan that fannie mae would buy, since they were virtually the only secondary market for mortgages prior to securitizations, and you could only make a small profit on each loan you originated.
 
The along came securtizations. You could make a lot more money and you could originate anything you could sell to your underwriters. They were the closest thing to a gatekeeper back in the heyday of securitizations from the mid 90s to the mid 00s. Yes there were subprime loans but there were also a ton of loans that were called "Alt-A" loans. These were loans to A credit borrowers that were deemed unconventional. Maybe a higher loan to value ratio. Maybe it was outside the city limits or a second home or a vacation home or a multi-use property that served as a home or there was more acreage with the home or whatever. And this led to an explosion of demand for housing, especially the more expensive housing, since demand is little more than an access to credit.
 
This is when you saw tons of McMansions and vacation homes being built. This is when you saw a ton of higher scale subdivisions going up left and right. Yes subprime was an issue, but there was so much more going on here than just subprime. And the hangover we are feeling now is related to so much more than subprime. That's why I sorta just grit my teeth when I hear politicians talk like they have a freakin clue about the housing mess. Because they don't have the faintest idea of what they are talking abou and the more they talk the more obvious it becomes.
 
I could go into a lot more detail here, but I don't want to write a book. So ask me any questions you want on this subject and I'll go into as much detail as I can. Not to be immodest, but I could write a textbook on this stuff for all the good it will do me. Securtizations are dead so my knowledge here is the equivalent of being really good at a dead language.
If you believe big government is the solution then you are a liberal. If you believe big government is the problem then you are a conservative.

Offline Dan

  • Moderator
  • Hero Member
  • *****
  • Posts: 3086
Re: What is a securitization aka toxic asset
« Reply #1 on: October 14, 2011, 07:56:07 AM »
As a point of reference I will give you my experience in this field.
 
I worked for a alt a lender in Dallas from 1996-1998. I built their bond administration department from scratch and took over and managed their investor reporting department too. I also prepared the management report book for senior management that told them how their prior securitizations performed from month to month. Losses, delinquencies, impairment testing, credit support levels, the whole 9 yards.
 
Then from 1999 to 2002 I worked for a "scratch and dent" lender in Miami. I built their investor reporting and investor accounting departments from scratch and then spent my last year on the transaction side helping to create new securitizations.
 
I don't claim to know everything about this subject, but I promise I can tell you more about this than anyone else you are likely to meet on the internet. I can talk from the details of loan payment collections and modificatins up to global issues such as default curves, impairment testing, gain on sale calculations and how transactions are put together with the underwriters.
 
So please feel free to ask me any questions you want.
If you believe big government is the solution then you are a liberal. If you believe big government is the problem then you are a conservative.

 

Powered by EzPortal