2. MORGAGE DAN ASSET BACKET SECTOR OF THE BOND MARKET Pertemuan 8 -mupo- MORGAGE DAN ASSET BACKET SECTOR OF THE BOND MARKET Pertemuan 8 -mupo- Mata kuliah: F0922 - Pengantar Analisis Pendapatan Tetap Dan Ekuitas Tahun: 2010

3. Bina Nusantara University 3 MORGAGE DAN ASSET BACKET SECTOR OF THE BOND MARKET Materi: Materi: 1. Mortgage backed sector of bond market 2. Asset backed sector of bond market

4. 1. Mortgage backed sector of bond market, simple reffered to as the mortgage sector of the simple reffered to as the mortgage sector 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 residential mortgage backed loans, reffered to as residential mortgage backed securities, nd securities backed by commercial securities, nd securities backed by commercial loans, reffered to as commercial mortgage backed loans, reffered to as commercial mortgage backed securities securities 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 predetermined obliges the borrower to make a predetermined series of payments. If the borrower defaults series of payments. If the borrower defaults

5. 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 in foreclose on the loan and to seize the property in order to ensure that the debt is paid off. order to ensure that the debt is paid off. The interest rate is called mortgage rate or The interest rate is called mortgage rate or contract rate. contract rate. 1.1.1 Fixed rate, level payment, fully amortized 1.1.1 Fixed rate, level payment, fully amortized mortgage mortgage - Rate is fixed for the life of the mortgage - Rate is fixed for the life of the mortgage loan loan - The amount of each monthly payment is - The amount of each monthly payment is the same for the life of mortgage loan the same for the life of mortgage loan - when the last scheduled monthly mortgage - when the last scheduled monthly mortgage

6. 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 uncertainty 1.1.2 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 the fully amortized mortgage assumes that the homeowner does not pay off any portion homeowner 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 monthly A payment made in excess of the monthly mortgage payment is called a prepayment. mortgage payment is called a 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 is amount of outstanding balance, there is a prepayment penalty. a prepayment penalty.

7. Prepayment and cashflow uncertainty (cont’) This period is reffered to as the lockout This period is reffered to as the lockout period or penalty period. During the period or penalty period. During the penalty period the borrower may prepay up penalty period the borrower may prepay 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 (CMBSs) 1.2 Commercial mortgage backed securities (CMBSs) backed by a pool of commercial mortgage loans backed by a pool of commercial mortgage loans on incoming producing property-multifamily on 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.

8. Commercial mortgage backed securities (cont’) Commercial loans are nonrecourse loan. If Commercial 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 balance borrower for any unpaid balance 2. Asset backed sector (ABS) of the bond market As an alternative the issuing of a bond, a corporation can issue a security backed by loans or receivables. As an alternative the issuing of a bond, a corporation can issue a security backed by loans or receivables. Debt instruments that have as their collateral loans or Debt 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 created is reffered to as a securitization. The transaction in which asset backed securities are created is reffered to as a securitization.

9. 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 loan is a loan backed by residential property. The loan was typically a secondcond lien onproperty that was 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 on Today, 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 and/or the payment to impaired credit history 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 home to puchase a new home

10. 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. In are backed by loans for manufactured homes. In contrast to site built homes, manufactured contrast to site built homes, manufactured homes are built at a factory and then transported homes are built at a factory and then 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 refinancing refinancing - 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

11. 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 securities 2.4 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 market. sectors for the asset backed securities 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 reasonably -major issuers have tended to follow reasonably

12. Auto loan backed securities (cont’) prudent underwriting standards. prudent underwriting standards.