securtization & mortgage loans

PRESENTATION ON

SECURTIZATION & MORTGAGE LOANS

A PART OFMERCHANT 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 lenders2. Matches supply of funds with demand

demands for funds through floating negotiable securities

SECURITISATION OF FINANCIAL ASSETS

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

SECURITISATION OF FINANCIAL ASSETS

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

SECURITISATION OF FINANCIAL ASSETS

Benefits of Securitisation:1. Separates the credit risk of the assets from

the credit risk of the Originator2. Illiquid assets converted into marketable

securities and thus provide alternate funding source

SECURITISATION OF FINANCIAL ASSETS

Benefits of Securitisation :

3. Remove assets from balance sheet and thus improve capital adequacy

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

SECURITISATION OF FINANCIAL ASSETS

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

having receivables from customers2. Special Purpose Vehicle: The entity which buys assets

from Originator and packages them into security for further sale

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

SECURITISATION OF FINANCIAL ASSETS

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

SECURITISATION OF FINANCIAL ASSETS

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

SECURITISATION OF FINANCIAL ASSETS

Eligible Collaterals:

1. Housing finance

2. Term loan finance

3. Car loan

4. Credit card receivables

5. Export credit etc...

SECURITISATION OF FINANCIAL ASSETS

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 OF FINANCIAL ASSETS

Securitisation Process:1. Selection of assets by the Originator2. Packaging of designated pool of loans and

advances (assets)3. Underwriting by underwriters4. Assigning or selling to of assets to SPV in

return for cash 5. Conversion of the assets into divisible

securities

SECURITISATION OF FINANCIAL ASSETS

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

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

8. The risk on the securities owned by investors is minimized as the securities are collateralisied by assets

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

SECURITISATION OF FINANCIAL ASSETS

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 of the SPV and formation of SPV as a Limited Company

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

3. Share Capital Structure4. Issuance of Bonds / Debentures etc. to investors (whether

by public issue or private placement) and servicing the investors

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.

PURPOSES To 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