Asset Securitization - Comptroller's Handbook - Borrower is Party to Securitization PG 8

7/23/2019 Asset Securitization - Comptroller's Handbook - Borrower is Party to Securitization PG 8

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Comptroller of the Currency

Administratoro National Banks

Securitization

Comptroller s Handbook

November 99

Ligui ity and Funds Management

BORROWER IS PARTY TO SECURITIZATION - PAGE 8

nhancer

Exhibit 1:

Parties

Involved In Structuring

Asset-Backed Securities

orrower

rlclnator ervlcer

peci l

urpose

ntitylTrultlle

Underwriter

nvestors

Borrower

The borrower is

responsible

payment

on the underlying loans

and therefore the ultimate

performance

of the asset-backed security. Because

borrowers

do not realize that their loans

the originating

bank is

often able

to maintain the

customer

relationship.

From a credit risk

perspective

securitization has made popular the

practice

grouping borrowers by letter or

categories.

At the top of the

rating

scale A

quality borrowers have relatively pristine credit histories. At the bottom D

quality borrowers usually have

severely

blemished credit

histories.

categories are by no means rigid; in fact credit evaluation problems exist

because one originator s A borrower may be another s A- or B borrower.

Nevertheless the terms A paper and BIC paper are becoming more and

more popular.

Exhibit 2 is an example of generic borrower descriptions

by Duff

Phelps

Credit

Rating

Corporation in rating

mortgage

borrowers.

borrowers

characteristics

in the exhibit

generalizations of each

category s

standards

and fluctuate over time; however the table

provide an

illustration of general standards in use today. For example an A quality

Securitization

Exhl•• 3: c.edk .isk

ific.lio.

• Talces catastrophiccredit

• U,ually somemultipl. 01 expected 10

• Cantake several forms(letter ofcredit,CIA, ere.)

-Takes market

minimal

creditrisk

E hncer

nvestor

latinS leney

O·ia; ·lo

Takes first-loss

(built[ntosecurity

strucbJ

• Set standards for level of

based on a

de ired

rating

Negotiates with

originator for

enhancement

based on desired creditrating

undertaken by the investors that buy the asset-backed securities themselves.

Although investors are exposed to other types of

prepayment or

interest

rate risk, senior-level

classes

asset-backed securities

typically

little

exposure

to credit

from the coupon rate

investors,

largest

expense in

structuring

an asset-backed

security is the

of credit

enhancement. Issuers

constantly attempting to minimize the costs associated with providing

credit protection to the ultimate

investors.

Credit enhancement

several different

forms,

although it can generally be divided into two

types: external

third-party or seller s guarantee or internal

structural

flow-driven). Common

of credit enhancements in use today include:

Credit

Enhancement

Provided by External

Parties

• Third party letter credit

For issuers with credit ratings below the

level sought

for the security issued, a third

may provide a letter of

credit to cover a certain amount of

or percentage of losses. Draws

on the letter of credit protection

repaid

possible

excess

flows from the securitized portfolio.

Asset Securitization

Exhibit

4: The

Two Stag

of a Revolving Receivable A

et Backed Security

Revolving p lod - • • tD p r l n ~ 1 p.yments

reinvested in new receivables;

s.II. s

~ t e s t absorbs luclua lDns trust

ba nces

Amortlu.lIon

period k vsstors are paid thslr

princip.1callectiDns

28 \ month 32

Revolving period ands and

amortization period begins

••

J _ . . I

lnv lor

Certlflcatea

lellsr lervi

.ddltlon.1

receivabl.s

Early Amortization Protection

In addition to the previously discussed credit enhancement types revolving

asset-backed

securities

typically

use early

amortization triggers to protect

Investors

from credit risk.

These triggers

payout

events accelerate the

repayment

of investor principal If

flow from the pool declines or the

condition of the pooled

assets

deteriorates.

This accelerated

repayment

method requires

that the

investors

share of all principal collections be

returned

Immediately as it is

received

by the trust.

The payout

events are

defined In the pooling

servicing agreement and series supplement of

each securitization and are

Intended

to protect investors from prolonged

exposure

to deteriorating

performance

of the underlying

assets

or the default

servlcer.

To monitor the asset-backed security s

performance

trustee

rating

agencies and Investors focus on several indicators of pool

performance:

portfolio yield the

the monthly payment

rate and

purchase

• ortfolio yiel generally consists of

types of payments: finance

charges

fees and

interchange. Finance

charges

are the periodic

Asset Securitization

Asset Securitization - Comptroller's Handbook - Borrower is Party to Securitization PG 8

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