scholarly journals Profit and Risk under Subprime Mortgage Securitization

2011 ◽  
Vol 2011 ◽  
pp. 1-64 ◽  
Author(s):  
M. A. Petersen ◽  
J. Mukuddem-Petersen ◽  
B. De Waal ◽  
M. C. Senosi ◽  
S. Thomas
Keyword(s):  
Risk Mitigation ◽  
Collateralized Debt Obligations ◽  
Mortgage Loans ◽  
Main Hypothesis ◽  
Subprime Mortgage ◽  
Important Indicator ◽  
Residential Mortgage ◽  
Maturity Mismatch ◽  
Mortgage Securitization ◽  
Collateralized Debt

We investigate the securitization of subprime residential mortgage loans into structured products such as subprime residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs). Our deliberations focus on profit and risk in a discrete-time framework as they are related to RMBSs and RMBS CDOs. In this regard, profit is known to be an important indicator of financial health. With regard to risk, we discuss credit (including counterparty and default), market (including interest rate, price, and liquidity), operational (including house appraisal, valuation, and compensation), tranching (including maturity mismatch and synthetic) and systemic (including maturity transformation) risks. Also, we consider certain aspects of Basel regulation when securitization is taken into account. The main hypothesis of this paper is that the SMC was mainly caused by the intricacy and design of subprime mortgage securitization that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness and ineffective risk mitigation. The aforementioned hypothesis is verified in a theoretical- and numerical-quantitative context and is illustrated via several examples.

Securitized Debt Markets

2019 ◽  
pp. 131-150
Author(s):  
Şenay Ağca ◽  
Saiyid S. Islam
Keyword(s):  
Risk Factors ◽  
Risk Sharing ◽  
Vital Role ◽  
Portfolio Diversification ◽  
Collateralized Debt Obligations ◽  
Residential Mortgage ◽  
Mortgage Backed Securities ◽  
Debt Markets ◽  
Commercial Paper ◽  
Collateralized Debt

Securitized debt markets play a vital role in financial markets in risk-sharing and creating alternative financing sources, which provide benefits for both borrower and lenders. This chapter describes the main characteristics of securitized debt and securitized debt instruments. Major securitized debt instruments are mortgage-backed securities (MBSs) including residential mortgage-backed securities (RMBSs) and commercial mortgage-backed securities (CMBSs) as well as asset backed commercial paper (ABCP) and collateralized debt obligations (CDOs). The characteristics of these securities, their associated benefits and uses, and the risk factors that determine the performance of securitized debt instruments are covered. The evolution and size of these securitized markets is also discussed. Overall, the chapter indicates that securitized markets help originators in transferring risks and monetizing illiquid assets and aid investors by providing an efficient mechanism for portfolio diversification and ability to better adjust their investments to their risk preferences.

AIG in Hindsight

2015 ◽  
Vol 29 (2) ◽  
pp. 81-106 ◽  
Author(s):  
Robert McDonald ◽  
Anna Paulson
Keyword(s):  
Real Estate ◽  
Life Insurance ◽  
Insurance Companies ◽  
Insurance Company ◽  
Collateralized Debt Obligations ◽  
Residential Mortgage ◽  
Bank Run ◽  
Mortgage Backed Securities ◽  
Collateralized Debt ◽  
Real Estate Assets

The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. Two large bets on real estate made with funding vulnerable to bank-run-like dynamics pushed AIG to the brink of bankruptcy. AIG used securities lending to transform insurance company assets into residential mortgage-backed securities and collateralized debt obligations, ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multisector collateralized debt obligations, backed by real estate assets, ultimately losing more than $30 billion. These activities were apparently motivated by a belief that AIG's real estate bets would not suffer defaults and were “money-good.” We find that these securities have in fact suffered write-downs and that the stark “money-good” claim can be rejected. Ultimately, both liquidity and solvency were issues for AIG.

Mortgage Securitization; Pricing and Risk Management

2017 ◽  
Author(s):  
Radu S. Tunaru
Keyword(s):  
Risk Management ◽  
Real Estate ◽  
Cash Flows ◽  
Mortgage Loans ◽  
Financial Instrument ◽  
Mortgage Securitization ◽  
Period Derivative

This chapter captures an overview of how real-estate risk is transferred to investors through securitization channels. A large part is dedicated to a less known financial instrument called balance guaranteed swap, which is a type of multi-period derivative contingent on cash-flows generated by a pool of mortgage loans. Emphasis is placed on the problems arising from modelling cash-flows and also revealed is the difficult task of dynamically managing the risk of the balance guaranteed swaps.

scholarly journals How financial products organize spatial networks: Analyzing collateralized debt obligations and collateralized loan obligations as “networked products”

2021 ◽  
pp. 0308518X2110296
Author(s):  
Jonathan Beaverstock ◽  
Adam Leaver ◽  
Daniel Tischer
Keyword(s):  
Financial Networks ◽  
Regulatory Regime ◽  
Collateralized Debt Obligations ◽  
The Us ◽  
Collateralized Debt Obligation ◽  
Role Based ◽  
Collateralized Debt ◽  
Collateralized Loan Obligation ◽  
Debt Obligation ◽  
Peak Value

During the 2010s, collateralized loan obligations rapidly became a trillion-dollar industry, mirroring the growth profile and peak value of its cousin—collateralized debt obligations—in the 2000s. Yet, despite similarities in product form and growth trajectory, surprisingly little is known about how these markets evolved spatially and relationally. This paper fills that knowledge gap by asking two questions: how did each network adapt to achieve scale at speed across different jurisdictions; and to what extent does the spatial and relational organization of today's collateralized loan obligation structuration network, mirror that of collateralized debt obligations pre-crisis? To answer those questions, we draw on the global financial networks approach, developing our own concept of the networked product to explore the agentic qualities of collateralized debt obligations and collateralized loan obligations—specifically how their technical and regulatory “needs” shape the roles and jurisdictions enrolled in a global financial network. We use social network analysis to map and analyze the evolving spatial and relational organization that nurtured this growth, drawing on data harvested from offering circulars. We find that collateralized debt obligations spread from the US to Europe through a process of transduplication—that similar role-based network relations were reproduced from one regulatory regime to another. We also find a strong correlation between pre-crisis collateralized debt obligation- and post-crisis collateralized loan obligation-global financial networks in both US$- and €-denominations, with often the same network participants involved in each. We conclude by reflecting on the prosaic way financial markets for ostensibly complex products reproduce and the capacity for network stabilities to produce market instabilities.

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