Optimal Securitization with Moral Hazard

Optimal Securitization with Moral Hazard
Author: Barney Hartman-Glaser
Publisher:
Total Pages: 46
Release: 2011
Genre:
ISBN:

This paper considers the optimal design of mortgage backed securities (MBS) in a dynamic setting with moral hazard. A mortgage underwriter with limited liability can engage in costly effort to screen for low risk borrowers and can sell loans to a secondary market. Secondary market investors cannot observe the effort of the mortgage underwriter, but they can make their payments to the underwriter conditional on the mortgage defaults. We find the optimal contract between the underwriter and the investors involves a single payment to the underwriter after a waiting period. The dynamic setting of our model admits three new findings. First, unlike static models that focus on underwriter retention as a means of providing incentives, our model shows that the timing of payments to the underwriter is the key incentive mechanism. Second, the maturity of the optimal contract can be short even though the mortgages are long-lived. Third, selling pooled mortgages is more efficient than selling mortgages individually because pooling allows investors to learn about the underwriter's effort more quickly, an information enhancement effect. Our model also allows an evaluation of standard contracts and shows that the ldquo;first loss piecerdquo; is a very close approximation to the optimal contract.

Asset Securitization and Optimal Retention

Asset Securitization and Optimal Retention
Author: John Kiff
Publisher: International Monetary Fund
Total Pages: 41
Release: 2010-03-01
Genre: Business & Economics
ISBN: 1451982011

This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening.

Understanding the Securitization of Subprime Mortgage Credit

Understanding the Securitization of Subprime Mortgage Credit
Author: Adam B. Ashcraft
Publisher: DIANE Publishing
Total Pages: 76
Release: 2010-03
Genre:
ISBN: 1437925146

Provides an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. Discusses the ways that market participants work to minimize these frictions and speculate on how this process broke down. Continues with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. Presents the key structural features of a typical subprime securitization, documents how rating agencies assign credit ratings to mortgage-backed securities, and outlines how these agencies monitor the performance of mortgage pools over time. The authors draw upon the example of a mortgage pool securitized by New Century Financial during 2006. Illustrations.

Corporate Risk Management

Corporate Risk Management
Author: Georges Dionne
Publisher: John Wiley & Sons
Total Pages: 416
Release: 2019-04-22
Genre: Business & Economics
ISBN: 1119583179

An updated review of the theories and applications of corporate risk management After the financial crisis of 2008, issues concerning corporate risk management arose that demand new levels of oversight. Corporate Risk Management is an important guide to the topic that puts the focus on the corporate finance dimension of risk management. The author—a noted expert on the topic—presents several theoretical models appropriate for various industries and empirically verifies theoretical propositions. The book also proposes statistical modeling that can evaluate the importance of different risks and their variations according to economic cycles. The book provides an analysis of default, liquidity, and operational risks as well as the failures of LTCM, ENRON, and financial institutions that occurred during the financial crisis. The author also explores Conditional Value at Risk (CVaR), which is central to the debate on the measurement of market risk under Basel III. This important book: Includes a comprehensive review of the aspects of corporate risk management Presents statistical modeling that addresses recent risk management issues Contains an analysis of risk management failures that lead to the 2008 financial crisis Offers a must-have resource from author Georges Dionne the former editor of The Journal of Risk and Insurance Corporate Risk Management provides a modern empirical analysis of corporate risk management across industries. It is designed for use by risk management professionals, academics, and graduate students.

Securitization: Past, Present and Future

Securitization: Past, Present and Future
Author: Solomon Y Deku
Publisher: Springer
Total Pages: 186
Release: 2017-08-04
Genre: Business & Economics
ISBN: 3319601288

This book aims to explore if and how securitization changed financial intermediation and lending behaviour by reviewing the pre- and post-financial crisis theoretical and empirical literature. The book’s distinctive feature is bringing the growing post-crisis empirical evidence to the attention of a wider audience by critically appraising it against pre-crisis arguments. With its thought-provoking insights, this book is of particular interest for students, practitioners and academics.

Structured Finance

Structured Finance
Author: Stefano Caselli
Publisher: Springer
Total Pages: 215
Release: 2017-10-09
Genre: Business & Economics
ISBN: 3319541242

This book, now in its second edition, provides an in-depth overview of all segments of the structured finance business, with particular reference to market trends, deal characteristics and deal structuring. The goal is to assist readers in gaining a clear understanding of the common features of structured finance transactions. The process of deal structuring for each type of transaction is carefully analyzed, with extensively updated chapters on asset securitization, project finance, structured leasing transactions and leveraged acquisitions. In the new edition, particular attention is paid to novel areas of intervention, such as public–private partnerships and non-performing loans in the resolution of bank restructuring. Although the subject of much criticism, structured finance, when used properly, offers an effective solution to the credit crunch that many European countries are suffering and is also a way to revive a single capital market for debt instruments. Readers will find this book to be an illuminating guide to the business and to the best market practices in organizing transactions. It will be of value for BSc and MSc finance students, professionals and consultants alike.

MBS Ratings and the Mortgage Credit Boom

MBS Ratings and the Mortgage Credit Boom
Author: Adam Ashcraft
Publisher: DIANE Publishing
Total Pages: 60
Release: 2010-11
Genre: Business & Economics
ISBN: 1437934617

Studies credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk; ratings contain useful info. for investors. There was also evidence of significant time variation in risk-adjusted credit ratings, incl. a progressive decline in standards around the MBS market peak between 2005 and mid-2007. Conditional on initial ratings, they observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans.