securtization & mortgage loans by moula

PRESENTATION

ON

SECURTIZATION & MORTGAGE LOANS

A PART OF

MERCHANT BANKING & FINANCIAL SERVICES

What is securitization?What is mortgages?Name some mortgages companies in India.

INTRODUCTIONSecurtization as a financing technique, is concerned with in securities, backed by pools of mortgage loans. The securities so created are known as Mortgages.

Securitization refers to the process of turning assets into securities.

When used in real estate, securitization means taking mortgages issued by the banks & other lenders & converting them into securities that can be sold to investors.

Financial instruments that can be readily bought & sold in financial markets, the way that stocks, bonds & futures contracts are traded.

DefinitionThe process of trading in the securities that are created on the backing of pools of mortgage loans from banks & financial institutions is called asset securitization .

Mortgage loans include housing loans, car & truck loans, credit card receivables, trade receivables, etc

A technique whereby assets are converted into securities, which are in turn converted into cash on an ongoing basis, with a view to allow for increasing turnover of business & profit, is known as asset securitization.

The technique provides for flexibility in yield, pricing pattern, issue risk & marketability of instruments, which is to the advantage of both borrowers & lenders.

MORTGAGES COMPANIES IN INDIA AREHDFC LTD LIC Housing finance LTD.ICICI Home finance company LTD.PNB Housing finance LTD.CAN Finance homes ltd.BOB Housing finance ltd.

Securitization Companies In India Are

Asset Reconstruction Company India Ltd (Arcil)Mumbai.

Aichemist Asset Reconstruction Company LtdNew Delhi.

Reliance Asset Reconstruction Company Pvt Ltd.Mumbai.

SECURITISATION OF FINANCIAL ASSETS

Why Securitisation?

1. A convenient mechanism to suit changing needs of borrowers and lenders

2. Matches supply of funds with demand demands for funds through floating negotiable securities


Genesis and Growth:

1. Severe financial crisis faced by certain states

in US during 1969-70

2. Federal government restriction on inter-state

lending and borrowing

3. Raised funds from surplus states by issuing

instruments backed by mortgaged properties


Elements of Securitisation:

1. Conversion of existing illiquid assets like

loans, advances and receivables into tradable

security

2. Reconverting them into fresh assets through

capital market operations


Benefits of Securitisation:

1. Separates the credit risk of the assets from the credit risk of the Originator

2. Illiquid assets converted into marketable securities and thus provide alternate funding source


Benefits of Securitisation :

3. Remove assets from balance sheet and thusimprove capital adequacy

4. Dependability of cash flows from the assets assignified by the ageing of the portfolio


The Players and their Role:1. Originator: An entity making loans to borrowers or

having receivables from customers

2. Special Purpose Vehicle: The entity which buys assetsfrom Originator and packages them into security forfurther sale

3. Credit Enhancer: To reduce the overall credit risk of asecurity issue by providing senior subordinate structure,over-collateralization or a cash collateral


The Players and their Role:

4. Credit Rating Agency: To provide value addition to security

5. Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription

6. Obligors: Whose debts and collateral constitute the underlying assets of securitisation

7. Investor: The party to whom securities are sold


Requirements for Eligible Collaterals:

1. Assets to be securitised to be homogeneous in

terms of:

2. Underlying assets

3. Maturity period

4. Cash flow profile


Eligible Collaterals:

1. Housing finance

2. Term loan finance

3. Car loan

4. Credit card receivables

5. Export credit etc...


Structure of Securitisation:

Pass Through Certificates:

– Sale of asset to SPV

– Investors purchase interest in the assets of SPV

– Cash flow (interest and principal) passed through as and when occurred without any reconfiguration

– Payments made are most often on monthly basis

SPV

RATING AGENCY

STRUCTURER

ANCILLARY SERVICE PROVIDER

OBLIGOR

ORIGINATORINVESTORS

Interest &Principal

Sale Of Assets

Consideration For Asset Purchased

Credit Rating Of Securities

Subscription Of Securities

Issue Of Securities


Securitisation Process:

1. Selection of assets by the Originator

2. Packaging of designated pool of loans and advances (assets)

3. Underwriting by underwriters

4. Assigning or selling to of assets to SPV in return for cash

5. Conversion of the assets into divisible securities


6. SPV sells them to investors through privateplacement or stock market in return for cash

7. Investors receive income and return of capitalfrom the assets over the life time of the securities

8. The risk on the securities owned by investors isminimized as the securities are collateralisied byassets

9. The difference between the rate of the borrowersand the return promised to investors is theservicing fee for originator and SPV


Legislations / Enactments and their impact on securitisation transactions:

The Companies Act 1956 affect the SPV in the following manner:

1. Framing of Memorandum and Article of Association ofthe SPV and formation of SPV as a Limited Company

2. Management of affairs viz. Board of Directors,Borrowing Powers / delegation of powers for recovery ofreceivables etc.

3. Share Capital Structure

4. Issuance of Bonds / Debentures etc. to investors (whetherby public issue or private placement) and servicing theinvestors

Features of securtizationMarketabilityMerchantable quality.Wide distribution.Homogeneity.Commoditization..

Need for securtization.

Helping small investors.Facilitating liquidity.Utility of instruments.Special purpose vehicle(SPV).

Asset securtization MechanismOrigination.Asset identification & pooling.Security creation.SPV’S taskSecurity issueSecurity purchase.Receipt of benefits.Rating & trading.

PURPOSESTo improve the return on capital.To raise finance when other forms of finance are unavailible.•To improve return on assets,•To diversify the sources of funding which can be assessed.

Economic functions of securtizationCreating financial market.Diversification.Promoting savings.Diversified risks.Focus on use of resources

Limitations of securtizations.

Debility to central bank,Heightened volatility.Pressure on profitability.

By Moula hussain K

Economy & Finance

securtization & mortgage loans by moula