MORGAGE DAN ASSET BACKET SECTORMORGAGE DAN ASSET BACKET SECTOROF THE BOND MARKETOF THE BOND MARKET

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Mata kuliah : F0922 - Pengantar Analisis Pendapatan Tetap Dan EkuitasTahun : 2010

Bina Nusantara University 3

MORGAGE DAN ASSET BACKET SECTORMORGAGE DAN ASSET BACKET SECTOROF THE BOND MARKETOF THE BOND MARKET

Materi:Materi:

1.1. Mortgage backed sector of bond marketMortgage backed sector of bond market

2.2. Asset backed sector of bond marketAsset backed sector of bond market

1.1. Mortgage backed sector of bond market,Mortgage backed sector of bond market, simple reffered to as the simple reffered to as the mortgage sectormortgage sector of the of the bond market, includes securities backed by a pool bond market, includes securities backed by a pool of mortgage loans.of mortgage loans. There are securities backed by residenctial mortgage There are securities backed by residenctial mortgage loans, reffered to as loans, reffered to as residential mortgage backed residential mortgage backed securities, securities, nd securities backed by commercial nd securities backed by commercial loans, reffered to as loans, reffered to as commercial mortgage backedcommercial mortgage backed securitiessecurities 1.1 Residential mortgage loans, 1.1 Residential mortgage loans, a mortgage is a loan secured by collateral of a mortgage is a loan secured by collateral of some specified real estate property which some specified real estate property which obliges the borrower to make a predeterminedobliges the borrower to make a predetermined series of payments. If the borrower defaultsseries of payments. If the borrower defaults

Residential mortgage loans (cont’)Residential mortgage loans (cont’)

the mortgage gives the lender the right to the mortgage gives the lender the right to

foreclose on the loan and to seize the property foreclose on the loan and to seize the property in in

order to ensure that the debt is paid off.order to ensure that the debt is paid off.

The interest rate is called The interest rate is called mortgage ratemortgage rate or or

contract rate.contract rate.

1.1.1 Fixed rate, level payment, fully amortized 1.1.1 Fixed rate, level payment, fully amortized

mortgagemortgage

- Rate is fixed for the life of the mortgage- Rate is fixed for the life of the mortgage

loanloan

- The amount of each monthly payment is - The amount of each monthly payment is

the same for the life of mortgage loanthe same for the life of mortgage loan

- when the last scheduled monthly - when the last scheduled monthly mortgagemortgage

Fixed rate, level payment….(cont’)Fixed rate, level payment….(cont’) payment is made the remaining mortgage payment is made the remaining mortgage balance is zero.balance is zero. 1.1.2 Prepayment and cashflow uncertainty1.1.2 Prepayment and cashflow uncertainty Cash flow from a level payment, fixed rate, Cash flow from a level payment, fixed rate, fully amortized mortgage assumes that thefully amortized mortgage assumes that the homeowner does not pay off any portionhomeowner does not pay off any portion of mortgage balance prior to scheduled due of mortgage balance prior to scheduled due date.date. A payment made in excess of the monthlyA payment made in excess of the monthly mortgage payment is called a mortgage payment is called a

prepayment.prepayment. A periode of time over which if the loan is A periode of time over which if the loan is prepaid in full or in excess of certain prepaid in full or in excess of certain amount of outstanding balance, there isamount of outstanding balance, there is a prepayment penalty. a prepayment penalty.

Prepayment and cashflow uncertainty (cont’)Prepayment and cashflow uncertainty (cont’) This period is reffered to as theThis period is reffered to as the lockout lockout periodperiod or or penalty period. penalty period. During the During the penalty period the borrower may prepay penalty period the borrower may prepay

up up to a specified amount of outstanding to a specified amount of outstanding balance without penalty. Over that balance without penalty. Over that specified amount, the panalty is set in specified amount, the panalty is set in terms of the number of month of interest terms of the number of month of interest that must be paid.that must be paid. 1.2 Commercial mortgage backed securities 1.2 Commercial mortgage backed securities

(CMBSs)(CMBSs) backed by a pool of commercial mortgage backed by a pool of commercial mortgage

loans loans on incoming producing property-multifamilyon incoming producing property-multifamily properties (apartement buildings), office properties (apartement buildings), office buildings, industrial properties (warehouses)buildings, industrial properties (warehouses) shopping centers, hotels and health care shopping centers, hotels and health care facilities.facilities.

Commercial mortgage backed securities (cont’)Commercial mortgage backed securities (cont’)

Commercial loans are nonrecourse loan. IfCommercial loans are nonrecourse loan. If

there is a default, the lender looks to the there is a default, the lender looks to the

proceeds from the sale of property for proceeds from the sale of property for

repayment and has no recourse to the repayment and has no recourse to the

borrower for any unpaid balanceborrower for any unpaid balance

2. Asset backed sector (ABS) of the bond market2. Asset backed sector (ABS) of the bond market

As an alternative the issuing of a bond, a corporation As an alternative the issuing of a bond, a corporation can issue a security backed by loans or receivables.can issue a security backed by loans or receivables.

Debt instruments that have as their collateral loans orDebt instruments that have as their collateral loans or

receivables are reffered to as asset backed securities.receivables are reffered to as asset backed securities.

The transaction in which asset backed securities are The transaction in which asset backed securities are created is reffered to as a created is reffered to as a securitization.securitization.

Asset backed sector of the bond market (cont’)Asset backed sector of the bond market (cont’) 2.1 Home equity loans,2.1 Home equity loans, is a loan backed by residential property. The loanis a loan backed by residential property. The loan was typically a secondcond lien onproperty thatwas typically a secondcond lien onproperty that was already pledged to secure a first lien.was already pledged to secure a first lien. Today, a home equity loan is often a first lien onToday, a home equity loan is often a first lien on property where the borrower has either an property where the borrower has either an impaired credit history impaired credit history and/or the payment to and/or the payment to income ratio is too highfor the loan to qualify as income ratio is too highfor the loan to qualify as a conforming loan for securitization. a conforming loan for securitization. The borrower used a home equity loan to The borrower used a home equity loan to consolidate consumer debt using the current consolidate consumer debt using the current home as collateral rather than to obtain funds home as collateral rather than to obtain funds to puchase a new hometo puchase a new home

Asset backed sector of the bond market (cont’)Asset backed sector of the bond market (cont’)

2.2 Manufactured housing backed securities,2.2 Manufactured housing backed securities,

are backed by loans for manufactured homes. are backed by loans for manufactured homes. In In

contrast to site built homes, manufactured contrast to site built homes, manufactured

homes are built at a factory and then homes are built at a factory and then transported transported

to a site.to a site.

There are several reason at this backed There are several reason at this backed

securities:securities:

- the loan balances are typically small so that - the loan balances are typically small so that

there is no significant dollar savings for there is no significant dollar savings for

refinancingrefinancing

- the rate of depreciation, in the early years is - the rate of depreciation, in the early years is

greater than the amount of the loan paid off.greater than the amount of the loan paid off.

- Typically borrowers are of lower credit quality- Typically borrowers are of lower credit quality

Manufactured housing backed securities (cont’)Manufactured housing backed securities (cont’)

and therefore find it difficult to obtain fund and therefore find it difficult to obtain fund

to refinance.to refinance.

2.4 Auto loan backed securities2.4 Auto loan backed securities

represents one of the oldest and most familiar represents one of the oldest and most familiar

sectors for the asset backed securities sectors for the asset backed securities market.market.

Historically, auto loan backed securities have Historically, auto loan backed securities have

represent between 18% to 25% of the asset represent between 18% to 25% of the asset

backed securities marketThe loans are of high backed securities marketThe loans are of high

credit quality for the following reasons:credit quality for the following reasons:

- they are a secured form of lending.- they are a secured form of lending.

- they begin to repay principal immediately- they begin to repay principal immediately

through amortization.through amortization.

- they are short term in nature- they are short term in nature

-major issuers have tended to follow -major issuers have tended to follow reasonablyreasonably

Auto loan backed securities (cont’)Auto loan backed securities (cont’)

prudent underwriting standards.prudent underwriting standards.