The Role of Securitization in Bank Liquidity and Funding Management

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June 17, 2009

Study of the Impact of Securitization on Consumers, Investors, Financial Institutions and the Capital Markets American Securitization Forum

Faten Sabry Chudozie Okongwu

NERA Economic Consulting

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Table of Contents
I.Executive Summary....................................................................................................... 5 A. Introduction ........................................................................................................... 5 B. Summary of Findings............................................................................................ 7 1. The Impact of Securitization on the Cost of Credit .......................................... 7 2. The Impact of Securitization on the Availability of Credit................................. 9 3. The Impact of Securitization on the Dispersion of Risk ................................. 11 4. The Impact of Securitization on Liquidity....................................................... 14 II. A. B. C. Overview of Securitization .................................................................................. 16 Introduction ......................................................................................................... 16 Overview: Structure of a Securitization............................................................... 17 A Brief History of Securitization .......................................................................... 20 1. The Agency Mortgage Market ....................................................................... 21 2. The Non-Agency Mortgage Market ............................................................... 26 Development of the Securitization Markets......................................................... 29 1. CMOs and REMICs ....................................................................................... 29 2. The Spread of Securitization ......................................................................... 31 3. CDOs............................................................................................................. 32 4. Securities Law Developments ....................................................................... 33 Literature Review................................................................................................ 35 Cost of Credit...................................................................................................... 37 Availability of Credit ............................................................................................ 44 Dispersion of Risk............................................................................................... 47 Market Liquidity................................................................................................... 49 The Credit Crisis and the Role of Securitization ................................................. 49

D.

III. A. B. C. D. IV.

The Role of Securitization in the Credit Crisis ............................................................... 50 A. Impact of Securitization on Incentives ................................................................ 50 B. Impact of Securitization on Underwriting Standards ........................................... 52 C. Information Asymmetries and Transparency ...................................................... 56 D. The Role of Securitization in Risk Dispersion and Contagion ............................. 57 Causes of the Ongoing Credit Crisis ........................................................................ 59 E. Housing Prices as the Trigger of the Credit Crisis .............................................. 59 F. The Role of the Rating Agencies ........................................................................ 60 G. The Role of Leverage in Amplifying Losses........................................................ 61 H. Accounting...
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