Securitization structure of mortgage backed securities, Financial Management

A mortgage, is sold to the SPV at the discretion of the bank to securitize it into a mortgage backed security, that is, the mortgage is said to have passed to the SPV which is usually a third party. The mortgage bank continues to service the mortgage on behalf of the SPV so that the client contact need not be passed on. In return for his service, he receives a fee from the SPV. The SPV issues MBS which are usually structured in various tranches to investors. These tranches may be AAA rated senior debt that is 95% of pool value, a junior debt which is again divided into one or more tranches rated AA, A and so on which is 5% of pool value and a reserve account usually guaranteed by the originator (mortgage bank) and this is less than 1% of pool value. The MBS is divided into different tranches to increase the credit risk of senior debt so that lower yield can be paid on the MBS.

An investor of an MBS gets the right not only to the cash flows but also to the collateral associated to the cash flows. However, the sale of collateral is only a supplementary measure.  Once the servicer or originator receives cash flows (interest and a mortization as per the contract) from the mortgagor, he transfers these cash flows to the trustee who then pays the investors coupon rate and principal.

Posted Date: 9/8/2012 8:05:18 AM | Location : United States

Related Discussions:- Securitization structure of mortgage backed securities, Assignment Help, Ask Question on Securitization structure of mortgage backed securities, Get Answer, Expert's Help, Securitization structure of mortgage backed securities Discussions

Write discussion on Securitization structure of mortgage backed securities
Your posts are moderated
Related Questions
What is Share exchange    Predator company offers their shares in exchange for target company's shares. So target shareholders become part of predator shareholders and so have

Treatment of PER IFRS 3 Business combinations necessitate goodwill on gaining to be calculated at the date control is gained. The second gaining gives ROB a 75% holding and

Q. Example on Walters dividend model? Example: - The following information is obtainable in respect of a firm: Capitalisation Rate (Ke)                     = 10% Earning

(a) Find the nominal rate of interest j compounded quarterly which is equivalent to a 5% e ective rate of interest. (b) Which one will deliver a higher future value on a deposit

What are the coupon bonds security instruments? Coupon bonds are contractual agreements by the borrowers to make regular payments (known as coupons or interest) until a specifi

Explain how using a risk-adjusted discount rate enhances capital budgeting decision making compared to by using a single discount rate for all projects? The risk-adjusted disco

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

Budgeting: All business owners should recognise and understand the importance of preparing and maintaining a financial budget for their business. Budgets are an essential fi

Prepare a capital budget analysis of the following data, your analysis should determine WACC, Net Operating Cash Flow, NPV, IRR, PI, and Payback analysis. This analysis is for t

A fixed income security investor can expect to receive a rupee returns from the following sources: (a) Interest payment, (b) Capital gain or loss at maturity or when so