Chapter 25

ASSET-BACKED SECURITIES MARKET

Asset-Backed Securities

Credit Card ReceivablesAutomobile LoansHome Equity LoansManufactured-Housing LoansStudent LoanSmall Business Administration LoansBond 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

Features of Asset-Backed Securities

Collateral amortizing asset nonamortizing

assetInterest 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

Home Equity Loans

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

Manufactured Housing-Backed Securities

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

Auto Loan-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

Student Loan-Backed Securities

Collateral Government

guarantee program Alternative loans

Cash Flow deferment period grace period loan repayment

period

Reference Rate

PrepaymentsIssuers

Student Loan Marketing Association (Sallie Mae)

Traditional corporate entities

Non-profit organizations

SBA 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

Credit Card Receivable-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

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 ServicerRating Agencies