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Chapter 25. ASSET-BACKED SECURITIES MARKET. Asset-Backed Securities. Credit Card Receivables Automobile Loans Home Equity Loans Manufactured-Housing Loans Student Loan Small Business Administration Loans Bond Obligations. Motivation. Asset-backed securities
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Chapter 25 ASSET-BACKED SECURITIES MARKET
Asset-Backed Securities • Credit Card Receivables • Automobile Loans • Home Equity Loans • Manufactured-Housing Loans • Student Loan • Small Business Administration Loans • Bond Obligations
Motivation • Asset-backed securities • alternative means of raising funds • lower funding cost • collateralized security • separation of pool of assets pledged as collateral from issuer
Collateral amortizing asset nonamortizing asset Interest rate fixed rate floating rate Structure pass-through pay-through Credit enhancements external, incl. corporate guarantee, letter of credit, bond insurance internal, incl. reserve funds, senior/subordinate structures Features of Asset-Backed Securities
Collateral residential property Types closed end open end Interest rate fixed rate floating rate Home equity loan-backed securities closed-end fixed-rate closed-end adjustable-rate Cash Flows net interest regularly scheduled principal repayments prepayments Home Equity Loans
Collateral loans for manufactured homes mortgage loan consumer retail installment loan Issuers Ginnie Mae Private entities Guarantors FHA VA Maturity 15-20 years Cash Flows net interest regularly scheduled principal prepayments Manufactured Housing-Backed Securities
Issuers financial subsidiaries of auto manufacturers commercial banks independent finance companies Maturity 3-6 years Cash Flows regularly scheduled monthly loan payments prepayments Structures pass-through pay-through Auto Loan-Backed Securities
Collateral Government guarantee program Alternative loans Cash Flow deferment period grace period loan repayment period Reference Rate Prepayments Issuers Student Loan Marketing Association (Sallie Mae) Traditional corporate entities Non-profit organizations Student Loan-Backed Securities
SBA Loans guaranteed by full faith and credit of U.S. government Variable rate loan Coupon Maturity SBA Loan-Backed Securities coupon interest scheduled principal repayment prepayments SBA Loan-Backed Securities
Collateral credit card receivables Issuers banks retailers travel and entertainment companies Interest Rate Fixed Floating Cash Flow collected finance charges fees principal Structure senior tranche subordinate/junior debt tranches equity tranche Credit Card Receivable-Backed Securities
Collateralized Bond Obligation • Collateral • non-investment grade corporate bonds • emerging market bonds • bank loans • Structure • senior tranche receiving floating rate • subordinate/junior debt tranche receiving fixed coupon rate • equity tranche
Evaluating Credit Risk of Asset-Backed Securities • Cash Flows • Corporate bond • Asset-Backed security • Role of Servicer • Rating Agencies