Introduction to Securitization

CHAPTER 4

Structuring Nonagency Deals

The discussion of structuring agency deals in the previous chapter gave us our first look at how securitization can be used to create bond classes that appeal to a greater number of investor types. The collateral for agency transactions is agency pass-through securities which are in turn backed by residential mortgage loans that conform to the underwriting standards of Ginnie Mae, Fannie Mae, and Freddie Mac.

The creation of agency CMOs is different in its motivation than for corporate entities using asset securitization. Agency deals are basically arbitrage transactions. Fannie Mae and Freddie Mac purchase a pool of pass-through securities and create bond classes so as to generate proceeds that exceed the cost of the pool of pass-through securities purchased as collateral. For corporations seeking funding using receivables and loans, securitization provides access to the capital markets and is a funding tool. The securitization process is different in an agency deal. In this chapter, we identify the basic structuring elements that differ from agency deals and the considerations in the securitization process.

One can think of a securitization transaction as a standalone profit-seeking corporation. Consider the basic features of a corporation. It has a balance sheet consisting of assets and liabilities. The structure of the liabilities and the mix between liabilities and equity is the capital structure decision. The difference between the ...