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Market ABX Index (subprime mortgages)
Markit CMBX Index (commercial mortgages)
Who sponsors asset securitizations? Banks, mortgage companies, finance companies, investment banks. Who purchases asset-backed securities? Institutional investors, including financial institutions, pension funds, insurance companies, mutual funds, hedge funds and money managers. Generally, ABS are not marketed to retail investors.
Asset Backed Securities (ABS) are securities (notes or bonds) that are issued with a structure that repayment is intended to be obtained from the cash flow generated by an identified (and secured / collateralized) pool of assets. Two types:
The ABS market is so well developed in the United States that assets (primarily bank originatedloan receivables; there are some "private label" securitizations in which a bank is not involved) are originated right into an ABS program.
By having a homogenous group of assets with similar terms, structures and credit characteristics, the proven histories of performance facilitates the modeling of future payments and thus analysis of yield and credit risks.
The financing of the receivables held in the SPV is usually accomplished by issuing short-term commercial paper to investors (through commercial paper dealers). The amount of commercial paper issued usually matches the level of assets held by the SPV. The short-term commercial paper needs to constantly be rolled over and the pricing to and acceptance by investors reflects the performance of the underlying receivables, the credit enhancement indicated above and the availability, performance an yield of alternative investments.
The credit enhancement of a securitization can also be achieved by dividing it into tranches and allowing some tranches be exposed first to any loss from defaulting / under-performing indivdual asset or group of assets first. In this manner, these front-line tranches almost function like an equity piece such that the investors in the other tranches (Mezzanine tranches) are stisfied first before the lower tranches. These lower-rated (first loss) tranches usually receive a higher yield (due to their higher risk position) when the security is first structured in order to attract investors when first brought to market.
Asset-backed securitizations also usually have a backup liquidity facility in place provided by a stand-by commitment from a syndicate (group) of banks. This facility protects the investors who purchase the commercial paper. If for some reason the SPV cannot attract the same or new investors to roll over the commercial paper or there is insufficient cash flow generated by the pool to pay off maturing commercial paper then the SPV draws on the backup liquidity facility to payoff the investors and the bank group then become the owners of the assets held by the SPV (to either wait for the cash flow to improve or to liquidate the portfolio).
Servicing
In addition, the assets need to "serviced" during the lifetime of the securitizaion: (depending on the asset class) the billing, collection and pass-through to investors of scheduled interest and principal payments, prepayments of principal, taxes, insurance, fees. Sometimes the originator retains the servicing of the assets and sometimes the "servicing rights" are sold to a third party, professional Servicer. The servicing is of value because the servicer is paid a fee to perform the actual function for the securitization and also collects late fees, processing fees, legal fees, etc. Secondly, servicing is very important: the interest and principal payment must correctly be allocated and distributed to the investors to retain their confidence and the individual loans of the underlying assets must be managed actively so that payments are sent as scheduled and in the amount as specified. In 2007, the role of servicing became very important such that servicers of residential mortgages had to determine how to work with subprime and adjustable rate mortgage borrowers in order to control the number of defaults and foreclosures that developed. In all asset classes, servicers are the closest to the individual borrower and are best able to monitor the account and respond quickly to any problems thus an experienced, adequately-staffed servicer is very important in the securitization market.
In 2008 / 2009 as the consensus developed to modify the terms of mortgage loans in foreclosure so the home owner could remain in the property a problem developed for the servicers. For instamce, Bank of America entered into an agreement (July 2008) with several state attorney offices to modify the terms of mortgages originated by Countrywide Financial Corp. (which Bank of America acquired). However, the modification program has been challenged by investors in the securitizations who will be forced to accept the unilateral principal reduction. In December 2008, the investors brought a lawsuit against Countrywide / Bank of America to force them to purchase, at face value, any and all loans that are planned to be modified. The counter argument is that most servicing agreements usually allow the servicer the opportunity to modify a loan in default status.
The most well-known asset backed security market is that of the Mortgage Backed Securities (MBS) market. The modern ABS market can be traced to 1970 when the Government National Mortgage Association (GNMA / Ginnie Mae), a wholly owned federal government corporation, first guaranteed a pool of mortgage loans. The Federal Home Loan Mortgage Corporation (FHLMC / Freddie Mac) in 1971 issued its first mortgage-backed participation certificates. For a number of years, mortgage-backed securities were almost exclusively a product of government-sponsored entities (GSE’s), such as Freddie Mac and the Federal National Mortgage Association (FNMA / Fannie Mae), and Ginnie Mae. Immediately after this development Soloman Brothers issued the first private label MBS.
There are RMBS (Residential Mortgage Backed Securities) and CMBS (Commercial Mortgage Backed Securities). In the RMBS market, companies such as the Federal National Mortgage Association (FNMA / Fannie Mae) purchase mortgages (individually or in groups) in the primary market from banks (savings and commercial), credit unions, insurance companies, etc., and packages the loans into MBS (which it guarantees for full and timely payment of principal and interest). FNMA issues various types of debt instruments in the global markets to fund its purchase of mortgages prior to securitization.
MBS are sometimes also referred to as Mortgage Pass-Through Certificates as the pro-rata share of the monthly interest, amortized principal payments (net of fees paid to to the issuer, servicer and/or guarantor of the respective security issue) and unscheduled principal pre-payments (many of the individual underlying mortgages have no penalty prepayment features that allow the mortgagee / borrower to make partial or full principal payments) generated by the underlying pool of individual residential mortgages in the securitization are "passed through" to the investors holding an undivided interest in the specific security. Due to the principa pre-payment feature repayment of principal to the holder of a pass-through security may accelerate during times of a declining interest rate environment, thus shortening the life of the security.
Each securitized pool has a Weighted Average Coupon / WAC (all of the mortgages within a specific security must be within 200 bps. of the WAC). The pass-through rate is lower than the WAC / interest rates on the underlying mortgages in the pool. FNMA provides a guarantee for its MBS for the timely payment of principal and interest to the investor, whether or not there is sufficient cash flow from the underlying group of mortgages. As some lenders continue to service the loan on the behalf of FNMA and the investor, part of the interest rate differential is used to compensate the lender for the servicing function. In addition, a portion of the interest rate ditterential is used to compensate FNMA for providing a guarantee of the security. Each security also has a Weighted Average Maturity (WAM), which indicates the average maturity in months of the underlying mortgages in the pool.
Only GNMA is authorized to issue a guarantee with the full faith and credit of the United States government for the timely payment of prinicipal and interest on mortgage-backed securities issued by institutions approved by GNMA and backed by pools of Federal Housing Administration-insured or Veterans Administration-guaranteed mortgages.
FNMA issues both fixed-rate mortgage and adjustable rate mortgage (ARM) securities.
Similar to residential mortgage backed securities in form and function, however the mortgages in the pool are on multi-family or commercial real estate (industrial and warehouse properties, office buildings, retail space, shopping malls, cooperative apartments, hotels, motels, nursing homes, hospitals and senior living centers). CMBS are issued in both public and private transactions and are issued in a variety of structures, including multi-class structures featuring senior and subordinated classes. The underlying mortgage loans of the securitization tend to lack standardized terms with regard to rate (fixed and floating), term, amortization and some properties also have comply with certain environmental laws and regulations.
A Collateralized Mortgage Obligation (CMO) is a security (debt instrument) that is collateralized by either a pool of whole / individual residential mortgages or pass-through mortgage-backed securities (whose underlying assets are also residential mortgages).
The underlying pools of mortgages of the CMO can consist of both conforming and non-conforming residential mortgages; and can can also be agency (guaranteed or issued by GNMA, FNMA, FHLMC) mortgages or certificate securities (Agency CMO) or private label securities (issued by financial institutions; Non-Agency CMO). Agency CMOs have a lower credit risk due to the government guarantee of the underlying residential mortgages.
This CMO is a special purpose entity (SPE) that owns the underlying whole loans or MBS securities, which is then divided into various securities (bonds) / tranches (classes) of payment streams with varying maturities and payment priority (seniority). The higher the seniority of the tranche the higher the credit rating of the tranche as it receives any scheduled repayment or unscheduled prepayment of principal first. However, the higher rated tranches earn the lowest interest rate return to investors. Thus, the AAA-rated tranche receives its principal repayment before the AA-rated, A-rated or BBB-rated tranche(s) or classes. The AAA-rated tranche may have an average duration of 3 years; the AA-rated tranche may have an average duration of 5 years; the A-rated Tranche may have an average duration of 7 years; and so on (this is often referred to as a sequential payment CMO).
The lower-rated tranches must absorb any loss prior to the higher rated tranches. However, the lower-rated tranches receive the highest interest rate payment due to the higher risk exposure.
In addition, some tranches are purposefully structured to payoff principal more rapidly than other tranches. However, conversely, tranches can also be structured to pay principal on a defined schedule during a low interest rate environment (when prepayments increase as mortgagors refinance to a lower interest rate) as long as prepayments remained within a pre-defined range.
The division of the security in the various tranches increases the different types of investor profiles than a single security could be marketed to (which is the reason why the CMO was created so that prepayment risk could be controlled and marketed to various types of investors). The division can also eliminate prepayment risk from some investor classes. The common CMO structures are: Interest Only, Principal Only, Floater, Inverse Floater, Planned Amortization Class (PAC), Support (to a PAC CMO), Scheduled, Sequential, Targeted Amortization Class (TAC), and Z or Accrual Bond. Unfortunately, due to the uniqueness of many of the multi-class (tranches) CMOs they are less liquid.
In an SMBS the interest and principal payments from a standard FNMA MBS are "stripped" out of the original security to create two new classes of security. One class of security receives the interest only (IO strip) and one class receives the principal only (PO strip). While they are exclusive of each other they can still be recombined if necessary at a later date. The pricing on either stripped security is usally at a discount from the par value of the underlying MBS. In a declining interest rate environment when the prepayment of residential mortgages acelerates as home owners refinance to lower rates, the PO strips also experience acelerated principal prepayment which increases the yield of the PO strip discounted security. However, in a declining interest rate environment, the IO strip receives less cash due to less outstanding principal balances on which to clculate interest, thus the yield actually declines on the IO strip.
In a rising interest rate environment, with lower volumes of prepayment of principal, the IO strip yield performs as expected or has an improved yield as there is sufficient prinicipal and maturity of the underlying mortgages to sustain the interest payments (however, the yield may not be as attractive as newly issued MBS with WAC that reflect the recent increase in mortgage interest rates).
A REMIC is a multi-class, investment grade mortgage-backed security created by Fannie Mae, Ginnie Mae, Freddie Mac and other entities. The monthly cashflow from the underlying mortgages are allocated to various tranches, resulting in each tranche having a separate and different maturity, coupon and payment priority compared to the other tranches in the security. The REMIC is not subject to income tax (except on net income from prohibited transactions, net income from foreclosure property, and contributions made after the startup day). In addition, REMICs also produce a residual of paper gains and losses in value ("phantom income" and "phantom loss"). Holders of the REMIC investment are required to pay tax on the phantom income however they actually never receive any actual cash. Phantom losses can by utilized to offset gains from other investments. Thus, investors in REMICs must pay other qualified entities to purchase the residual and the tax liability it generates (pension plans and non-U.S. individuals are barred from owning a residual).
REMICs are governed by sections 860A through 860G of the Internal Revenue Code (IRC).
A RESI is a security collateralized by a pool of mortgages like many mortgage-backed securities. However, unlike other MBS, a RESI passes along any loss incurred from an underlying mortgage to an investor. Thus, if a property ever goes into foreclosure and there is insufficient value received from the sale of the property to satisfy the outstanding mortgage principal and accrued interest, then that loss is passed on to the investor. The security is divided into several tranches with the lowest rated tranche incurring the first losses and then each successively rated tranche incurring the next losses if the first tranche is liquidated by accumulated losses. In exchange, the lowest rated tranche receives a very high market interest rate in the form of a margin over LIBOR.
In a synthetic CLO The assets remain on the balance sheet of the sponsor. Instead, the credit risk of the collateral pool of loans is transferred to the SPV by means of a credit derivative (portfolio default swap).
Standard & Poor's CDO credit actions: www2.standardandpoors.com/spf/xls/media/Cash_Hybrid_CDO_Actions.xls (.xls file)
Refers to multi-class CMOs, CBOs and CLOs held by an SPV or an SIV (Structured Investment Vehicle) or an SPE (Special Purpose Entity). The SPV or SIV can divide a portfolio of securities into various tranches with various maturities, interest rates, seniority, credit enhancement and external credit rating in order to market the securitixation to several investor profiles.
Individual loans or debt issues are bundled into a single security. Groups of securities are then bundled into a CDO. There is usually a separate Collateral Manager who manages the CDO assets and is paid an asset management fee. The CDO usually have different tranches representing risk (one group of investors absorbs the first losses) and retrun (the lower risk tranche receives a lower interest rate). The highest credit rated tranches are Super Senior / Senior (rated AAA), followed by Mezzanine (rated AA to BB) and the lowest rated tranches are often referred to as the Equity level (which are unrated and incur the first losses but receive the highest interest rate). Portions of the CDO can also be placed into a new CDO with its own specific structure. The structure may include the lower rated tranches of the first CDO that are then structured in a new CDO with a higher credit rating although the undelying securities / CDO are still the BBB to B rated tranches.
In 2007, CDOs consisting of subprime U.S. residential mortgage-backed securities caused a serious problem within the banking and financial markets when it was determined that the stress modeling conducted by the credit rating agencies in analyzing these securities did not really equate the actual performance of these assets. The number of defaulted real estate loans in the subprime market was so numerous that even the super senior tranches of CDOs (senior-most positions of the capital structure) were of doubtful value. This led to a substantial revision (downgrade) of the credit ratings that Moody's and S&P had originally assigned to these assets.
The rapid deterioration of these assets and the credit downgrades resulted in a situation where investors were not willing to purchase the Commercial Paper of the SIVs because it was unclear whether there will be further deterioration in the subprime residential mortgage market. In addition, it also became known in the marketplace that some of the more complex CDOs and/or subprime MBS could not adequately or accurately be valued, and that some valuations had actually been conducted by the owner/manager of the CDO (Level 3 securities) or had been established through a coordinated, non-arms length sale. Thus, there was an extreme lack of liquidity in the Asset-Backed Commercial Paper (ABCP) market and a resulting slowdown of the Commercial Paper market for SIV-issued CP, which placed significant pressure on the ability of all SIVs to refinance maturing Commercial Paper regardless of what assets they were holding.
Why aren't even the super senior tranches of U.S. residential mortgage-backed securities CDOs regarded safe? Some of these super senior tranches are not subject to valuation based on observable market transactions. Accordingly, fair value of these super senior exposures is based on estimates about, among other things, future housing prices to predict estimated cash flows, which are then discounted to a present value. The rating agency downgrades and market developments referred to above have led to changes in the appropriate discount rates applicable to these super senior tranches, which have resulted in significant declines in the estimates of the fair value of the super senior tranches.
In November 2007, the Trustees of Carina CDO Ltd., indicated that they would liquidate the assets of the CDO. The Triple-A ratings of senior Tranche, Tranche A-1, were downgraded by S&P to junk bond status. It is anticipated that the sale of the CDO's assets may provide the market with an indication of where distressed asset values may be.
An Arbitrage CDO is an investment vehicle designed to take advantage of the difference between the yield on a portfolio of selected assets and the cost of funding the CDO through the sale of notes to investors. Arbitrage CDOs are classified as either “cash flow” CDOs, in which the vehicle passes on cash flows from a relatively static pool of assets, or “market value” CDOs, where the pool of assets is actively managed by a third party.
In a Synthetic CDO, the entity enters into derivative transactions which provide a return similar to a cash instrument to the entity, rather than the entity’s actually purchasing the cash instrument. Typically these instruments diversify investors’ risk to a pool of assets as compared with investments in individual assets.
A Constant Proportion Debt Obligation (CPDO) utilizes a cash account as collateral for issuing credit default swaps. In October 2007, a specific CPDO, the UBS Tyger Series 103 notes, which had issued credit default swaps on financial institutions (banks and insurance companies) experienced a 10% decline in value (when index spreads increased) and a substantial downgrade from the ratings agencies. On November 13, 2007, Moody’s placed eight additional CPDOs under review for possible downgrade due to continuing spread widening in the "financials" sector.
A FASIT is a tax structure established by U.S. Legislation for the purpose of attracting investment business to the United States and away from offshore tax havens. As long as a FASIT has a particular capital structure and adheres to certain investment regulations, then the FASIT can accumulate and distribute its gross earnings without incurring U.S. taxation. CDOs may be issued in the form of "regular interests" in a FASIT. For information on FASITs, see sections 860H through 860L of the Internal Revenue Code (IRC).
When a company pledges away its income to asset-backed investors, it effectively places corporate bondholders in a second position claim on the assets of the company / financial institution. If the company goes bankrupt, then the corporate bond holders would not be allowed to go after the assets previously promised to the asset-backed trust, at least not until the asset-backed investors were paid off.
Gain on sale accounting: earnings are only as good as the company's assumptions on performance of each securitization. If the pool of loans does not perform as well then the company has overstated its earnings.
The triple-A rating that the ratings agencies confer upon these deals is based on various types of credit enhancement built in that make loss of principal highly unlikely. But the triple-A ratings do not address the risk that high losses within the securitized trust will force the deal to pay off early leaving bondholder's with reinvestment risk. Nor does the initial rating suggest how the bond may perform in the secondary market.
Deposit Trust: conveys a participation interest to the owner trust, which then issues notes and certificates to investors.
A QPSE is described in FASB Statement of Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", which includes conditions to limit the permissible activities of the QSPE, what the
QSPE can hold, and when the QSPE can sell or dispose of non cash financial assets.
72.3.243.42/st/summary/stsum140.shtml
SIV (Structured Investment Vehicle) are credit arbitrage vehicles. They issue debt in the U.S. and Euro medium-term note and commercial paper markets, and with the proceeds, purchase assets of varying maturities. These assets consist of traditional classes of debt and ABS. Derivatives transactions are used to eliminate both interest-rate and foreign-exchange risk. Since the SIVs are funding at the inexpensive AAA levels (commercial paper, junior notes and medium-term notes) but can purchase securities/assets at varying investment-grade rating levels, they can pick up credit spread over the life of that asset. Some SIVs are bank sponsored and some are privately sponsored. In either case, the SIV and its assets are usually off the balance sheet of the sponsor. For instance, on November 26, 2007, HSBC announced that it would place 2 of its SIVs back on its balance sheet and provide them with additional funding in the amount of $35 billion in order to restore investor confidence.
SIVs include:
III Offshore Advisors (Abacas Investments)
AIG (Nightingale Finance)
Axon Financial (Axon)
Bank of Montreal (Links Finance, Parkland Finance)
Cheyne Capital (Cheyne Finance)
Citigroup (Beta Finance, Centauri, Dorada, Five Finance, Sedna Finance, Zela, Vetra)
Dresdner Kleinwort Wasserstein (K2 Corp)
Eaton Vance (EV Variable Leveraged Fund)
Eiger Capital (Orion Finance)
Gordian Knot (Sigma Finance, Theta Finance)
HSBC (Asscher Finance, Ltd., Cullinan Finance, Ltd.)
HSH Nordbank (Carrera Capital Finance)
IKB KG (Rhinebridge)
IXIS/Ontario Teachers (Cortland Capital)
MBIA (Hudson-Thames Capital)
Rabobank International (Tango Finance, in association with Citigroup)
Societe Generale (Premier Asset Collateralized Entity / PACE)
Standard Chartered Bank (White Pine Corp., Whistlejacket Capital)
Stanfield Global Strategies (Stanfield Victoria Finance)
West LB (Harrier Finance Funding Ltd., Kestrel Funding PLC and Kestrel Funding US LLC in association with Brightwater Capital Management)
SNAP (Structured Note Asset Packaging) are repackaged notes, which includes a trust structure that allows it to ring-fence a pool of underlying assets into separate new issues.
The discussion covers the receivables securitization of the credit card industry. To see the operational side of credit card issuance and usage please see the Cash / eCash Page. To see the consumer side of credit card issuance and usage please see the Consumer Banking Products Page.
With regard to credit cards, the issuer sells receivables (not the actual accounts) to a trust while retaining an interest in a portion of the pool. Certificates representing the vast majority of the pool, usually 80% to 90%, are then sold to investors as asset-backed securities (ABS).
Credit card debt is unsecured. If the borrower defaults then the bank has no opportunity for recovery from the sale of an asset or collateral. A bank can pursue legal claims against the borrower but it is expensive, time consuming and unclear how much can be collected (as of 2005, credit card debt cannot be entirely discharged in a personal bankruptcy filing). If enough credit card holders defaulted within a given pool of receivables in a securitization, and the reserve account and/or over-collateralization was exhausted, then an investor could incur a loss.
In addition to credit risk posed by individual borrowers, credit risk also exists in the overall credit card portfolio. Relaxed underwriting standards, aggressive solicitation programs, inadequate account management, as well as a deterioration of general economic conditions, can increase credit risk. Changes in product mix, and the degree to which the portfolio has concentrations, geographic or otherwise, can also impact a portfolio’s risk profile. The portfolio has to be analyzed in terms of portfolio performance (percentage of non-performing receivables in relation to the total portfolio), profitability, and customer profiles by business lines, products, and markets. One must also consider changes in underwriting standards, account acquisition channels, credit scoring systems, and marketing plans. Some securitizations are structured such that the failure to adequately underwrite or collect loans also may trigger early amortization of the securitization.
Poorly underwritten or performing receivables can affect a bank’s reputation as an underwriter of credit card securitizations. This creates a risk that future credit enhancements for securitizing credit card receivables may be available at an increased cost or not available at all. Future accessibility to financial markets may be limited or cost more.
Student loans for higher education purposes at the 2-year college, 4-year college, gradute degree programs and trade schools
are securitized in the United States. In the past 10 years, approximately $350 billion in student loans have been
securitized. The student loan market has its own unique characteristics:
Originally, student loans made under the Federal Family Education Loan Program (FFELP) were guaranteed up to 98.0% of the outstanding principal by a guarantee agency reinsured by the Department of Education. As a result, if the borrower under a student loan were to default then the issuer of a student loan-backed security would only experience a loss of 2.0% of the outstanding principal and accrued interest on the defaulted loan. However, under the terms of the Higher Education Reconciliation Act of 2005 (signed into law February 8, 2006), the guarantee was reduced to 97.0% for all student loans first disbursed on or after July 1, 2006. The issuer has no right to pursue the borrower for the remaining 3.0% unguaranteed portion of the defaulted student loan. (If the issuer suffers a loss of the 3.0% of the outstanding principal balance of an individual loan as the result of a default, and the amounts in either a capitalized interest fund or reserve fund were insufficient to cover the loss then the investor in the securitization would either suffer a delay in payment or loss on the investment).
The Student Loan Marketing Association (SLMA or Sallie Mae), was the only Government Sponsored Enterprise (GSE) that purchased these loans from financial institutions and specialized lending programs, and then securitized a pool of student loans that are in turn sold to investors. SLMA also guaranteed individual issued securitizations (although many of the loans securitized already had a FFELP / Federal Guaranteed Student Loan Program federal government guarantee).
In September 2006, the SLMA terminated its GSE designation and became a privatized concern. The successor entity is SLM Corp., continues to use the Sallie Mae name. All existing securitizations funded by debt incurred by SLMA (a AAA rated entity) had to be refinanced as part of the privatization completion, as the successor entity, SLM Corp. is only a single-A+ rated issuer. In 2007, SLM Corp., was set to be acquired by a private investor group. However, after problems in the ABS market for all assets, increasing defaults in the student loan securitizations, a $344 million loss in the third quarter of 2007 and legislation that revised student loan lending procedures, the investor group claimed that a "material adverse effect" had occurred and terminated the offer.
Some of the largest originators of student loans include: Astrive Student Loans, Bank of America, Citigroup, Inc., College Loan Corp., Comerica Bank, Discover Financial Services, Fifth Third Bank, GCO Education Loan Funding Corp., JP Morgan Chase, Key Bank, National Education, Nelnet Inc., NorthStar Capital Markets Services, Inc., SLM Corp. / Nellie Mae, Student Loan Network, SunTrust Bank, Wells Fargo, Wachovia.
Some of the largest instituions securitizing student loans include First Marblehead Corp., SLM Trusts / SMS Trusts (SLM Corp.)
In 2007 it was exposed that there was a conflict of interest between some universities and some participants in the student loan industry. Some of the loan originators were offering revenue-sharing plans to college financial aid officers and university alumni associations in exchange for the officer or association to steer the potential student borrower to the company. In addition, during 2007 the The Senate Banking Committee and New York States Attorney General's Office looked into how student lenders were pricing loan interest rates (which appeared to be on a school by school basis rather than a standard).
In December 2007, legislation was passed that reduced federal subsidies on federally guaranteed student loans paid to student loan originators.
As indicated above, the default rate on student loans has increased during 2007. Many students had to take on a substantial amount of debt to pay for a college education. Secondly, as young students have no credit background or assets, parents had to be co-signers on the student loans. In order to have sufficient funds some families had to refinance their residential property to convert equity into cash. If these borrowers took out adjustable-rate mortgages and the loans are now resetting the rate then these families have insufficient cash flow to remain current on the new mortgage payment and assisting the child on the student loan payment.
One of the largest student loan securitizers, First Marblehead Corp., indicated in December 2007 that the company would curtail new securitizations in response to disruption in the ABS markets. In addition, Education Resources Institute Inc. (TERI), which guarantees nearly all the student loans in First Marblehead securitizations, had its credit rating placed under review for possible downgrade.
Additional student loan guarantors include:
American Student Assistance (Massachusetts Higher Education Assistance Corporation)
California Student Aid Commission (CSAC)
College Access Network (formerly Colorado Student Loan Program)
Connecticut Student Loan Foundation (CSLF)
Education Credit Management Corporation (ECMC)
Finance Authority of Maine (FAME)
Florida Office of Student Financial Assistance
Georgia Higher Education Services Corporation
Great Lakes Higher Education Guaranty Corporation
Illinois Student Assistance Commission (ISAC)
Kentucky Higher Education Assistance Authority (KHEAA)
Louisiana Student Financial Assistance Commisssion (LOSFA)
Michigan Higher Education Assistance Agency
Missouri Student Loan Program
Montana Guaranteed Student Loan Program
National Student Loan Program (NSLP)
New Jersey Higher Education Student Assistance Authority
New York State Higher Education Services Corporation
Northwest Education Loan Assistance (NELA)
Office of Student Financial Assistance (OSFA)
Oklahoma Guaranteed Student Loan Program
Pennsylvania Higher Education Assistance Agency (PHEAA)
Rhode Island Higher Education Assistance Authority
State Higher Education Services Corporation (SHESC)
Student Loan Guarantee Foundation of Arkansas
Tennessee Student Assistance Corporation
Texas Guaranteed Student Loan Corporation (TGSLC)
United Student Aid Funds, Inc. (USAF)
Student loans are also funded short-term in the aution rate securities market. This specific asset class is known as the Student Loan-Backed Auction Rate Securities / Notes (SLARS) and are auctioned periodically to money market investors.
Please also see Leases and Leasing Company Credit Analysis
Leased equipment receivables are generated from telecommunications equipment, copiers, fax machines, general business equipment, computers, medical / dental diagnostic and surgical equipment, restaurant equipment, printing and graphics equipment, agricultural equipment, and treansportation-related equipment. The leases can be either and operating lease or a finance lease.
Equipment lease obligors are primarily commercial entities (not consumers). The leases also have lower prepayment risk than consumer receivables due to contractual provisions that discourage prepayment. In addition, residual value performance / realization has been quite adequate.
Equipment lease-backed securitizations are both publicly issued and privately placed.
Similar to other securitizations, equipment lease-backed securitizations usually have senior, investment grade tranches and subordinated, non-investment grade tranches. In addition to the subordinated tranches, credit enhancement is also increased in the form of cash reserve accounts and equipment residual valuation.
The registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934 is addressed under 17 CFR Parts 210, 228, 229, 230, 232, 239, 240, 242, 245 and 249. The SEC revised the regulations in 2005 because many of the Commission’s existing disclosure and reporting requirements, which were designed primarily for corporate issuers and their securities, did not elicit relevant information for most asset-backed securities transactions. The new rules and amendments that have been adopted are designed to address the four primary regulatory areas affecting asset-backed securities: Securities Act registration; disclosure; communications during the offering process; and ongoing reporting under the Exchange Act.
