HENRY AVISon mor tgage-backed securities. Anand Bhattacharya, Bill Berliner, and Frank Fabozzi...
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O nce again, we start our issue with an article on structured finance issues related to the current credit crisis. Jerry Fons describes the conflicts of interest inherent in the credit rating agencies’ issuer-pays business model and the need for more competition in the credit rating business, which will not be possible until issuers of structured securities are required to pro- vide sufficient transparency in the details of underlying collateral so that any credit rating agency can do the required analysis to offer an unsolicited opinion. Mr. Fons made similar points in his testimony before the U.S. House Committee on Oversight and Government Reform in a hearing on October 22 concerning the role of the rat- ing agencies in the current financial crisis. Next we have two articles on mortgage-backed securities. Anand Bhattacharya, Bill Berliner, and Frank Fabozzi provide a detailed technical analysis of how mortgage rates are determined based on capital market pricing, credit enhance- ment cost, and valuation of servicing assets; they then show us how a rate/point grid is determined, how credit enhancement and servic- ing costs are compared between the agency and private label market sectors, and how the risk-based pricing process works. Alex Levin describes a proprietary method for analyzing a portfolio of mortgage- backed securities (MBS) that reflects the continually changing dynam- ics of interest rates and home prices and a monthly updated delinquency composition; this method can be used to spot credit deterioration in advance of a credit rating agency downgrade and to assess the port- folio’s credit risk in both loss levels and odds of occurrence. Then, closely related to MBS, Doug Lucas, Frank Fabozzi, Laurie Goodman, Andrea Montanari, and Armin Peter provide an introductory article on covered bonds, a form of financing in which mortgages and other loans remain on a bank balance sheet, collateralized by a “cover pool.” The authors describe recent legislative and regulatory steps taken in the United States to get the covered bonds market started. They explain that covered bonds are not a panacea for recent problems with MBS but are still likely to occupy a niche in the market. Hylton Heard and John Bella give us an update on auto loan ABS, recently the second-largest ABS class (behind credit cards) in issuance, through an analysis of the credit fundamentals that determine current auto loan ABS ratings. They point to increased net loss rates in the current economic environment. Martin Nance then gives us some insight into the credit derivatives market through a description of the “credit derivative product company” and the needs it satisfies, which include acting as credit backstops for dealers in credit default swaps and as counterparties to absorb banks’ mark-to-market risk. VOLUME 14, NUMBER 3 FALL 2008 HENRY A. DAVIS Editor HARRY KATZ Production and Technology Director IAN AU Senior Marketing Manager SEGAL BENGIGI Digital Business Development Manager PETER JUNCAJ Head of Subscription Sales RENEE CHEN Account Manager ROBERT FRANKEL Account Manager DEWEY PALMIERI Reprints Manager ROBERT TONCHUK Director, Central Operations and Fulfillment KELVIN LOUIE Senior Fulfillment Manager EMPERATRIZ MIGNONE Fulfillment Manager STEVE KURTZ Director, Finance & Operations JUSTIN GLAZER Management Accountant DAVID BLIDE Associate Publisher SAMANTHA RALPH Advertising & Marketing Coordinator ALLISON ADAMS Publisher CHRIS BROWN President GARY MUELLER Chairman & CEO by guest on May 18, 2020. Copyright 2008 Pageant Media Ltd. https://jsf.pm-research.com Downloaded from
Transcript of HENRY AVISon mor tgage-backed securities. Anand Bhattacharya, Bill Berliner, and Frank Fabozzi...
Once again, we start our issue with an article on structuredfinance issues related to the current credit crisis. JerryFons describes the conflicts of interest inherent in thecredit rating agencies’ issuer-pays business model and the
need for more competition in the credit rating business, which willnot be possible until issuers of structured securities are required to pro-vide sufficient transparency in the details of underlying collateral sothat any credit rating agency can do the required analysis to offer anunsolicited opinion. Mr. Fons made similar points in his testimonybefore the U.S. House Committee on Oversight and GovernmentReform in a hearing on October 22 concerning the role of the rat-ing agencies in the current financial crisis. Next we have two articleson mortgage-backed securities. Anand Bhattacharya, Bill Berliner, andFrank Fabozzi provide a detailed technical analysis of how mortgagerates are determined based on capital market pricing, credit enhance-ment cost, and valuation of servicing assets; they then show us how arate/point grid is determined, how credit enhancement and servic-ing costs are compared between the agency and private label marketsectors, and how the risk-based pricing process works. Alex Levindescribes a proprietary method for analyzing a portfolio of mortgage-backed securities (MBS) that reflects the continually changing dynam-ics of interest rates and home prices and a monthly updated delinquencycomposition; this method can be used to spot credit deterioration inadvance of a credit rating agency downgrade and to assess the port-folio’s credit risk in both loss levels and odds of occurrence. Then,closely related to MBS, Doug Lucas, Frank Fabozzi, Laurie Goodman,Andrea Montanari, and Armin Peter provide an introductory articleon covered bonds, a form of financing in which mortgages and otherloans remain on a bank balance sheet, collateralized by a “cover pool.”The authors describe recent legislative and regulatory steps taken inthe United States to get the covered bonds market started. Theyexplain that covered bonds are not a panacea for recent problemswith MBS but are still likely to occupy a niche in the market.
Hylton Heard and John Bella give us an update on auto loanABS, recently the second-largest ABS class (behind credit cards) inissuance, through an analysis of the credit fundamentals that determinecurrent auto loan ABS ratings. They point to increased net loss ratesin the current economic environment. Martin Nance then gives ussome insight into the credit derivatives market through a descriptionof the “credit derivative product company” and the needs it satisfies,which include acting as credit backstops for dealers in credit defaultswaps and as counterparties to absorb banks’ mark-to-market risk.
VOLUME 14, NUMBER 3 FALL 2008
HENRY A. DAVIS Editor
HARRY KATZ Production and Technology Director
IAN AU Senior Marketing ManagerSEGAL BENGIGI Digital Business Development
Manager
PETER JUNCAJ Head of Subscription SalesRENEE CHEN Account Manager
ROBERT FRANKEL Account Manager
DEWEY PALMIERI Reprints Manager
ROBERT TONCHUK Director, Central Operations and Fulfillment
KELVIN LOUIE Senior Fulfillment ManagerEMPERATRIZ MIGNONE Fulfillment Manager
STEVE KURTZ Director, Finance & Operations
JUSTIN GLAZER Management Accountant
DAVID BLIDE Associate PublisherSAMANTHA RALPH Advertising & Marketing
Coordinator
ALLISON ADAMS PublisherCHRIS BROWN President
GARY MUELLER Chairman & CEO
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Finally, we have a section of five articles that explain how securitization servesinsurance companies’ risk management and fund-raising needs. Ray Johnson andDavid Booysen explain the underpinnings of a life insurance company’s businessmodel, introduce us to life-linked financings, show how capital markets can be usedto finance insurance company needs, and discuss the benefits and opportunities oflife-linked investments for issuers and investors. Then Alison McKie shares anotherview of how the capital markets are used to absorb insurance and related financialmarket risks for an insurer or reinsurer; she describes three categories of life-insur-ance-linked securities: catastrophe cover; embedded value; and financing transac-tions, such as redundant reserve financing. Nick Potter and Michael McDonnellexplain the legal structures for statutory reserve financings and embedded valuemonetizations, the two types of life-insurance-based securitization that have pre-dominated in the market to date. Malcolm Wattman and Matthew Feig then explainhow catastrophe bonds, or “cat bonds,” provide reinsurance protection for natu-ral catastrophe risks while also providing an important opportunity for investorsto diversify away from credit and interest-rate risk. Finally, Morton Lane comparesreinsurance in the capital markets with traditional reinsurance mechanisms; heexplains why traditional reinsurers earn higher returns on capital but also why cap-ital markets reinsurance is playing an important and growing role in the market.
Henry A. DavisEditor
2 THE JOURNAL OF STRUCTURED FINANCE FALL 2008
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