Introduction to Structured Finance

APPENDIX B

Synthetic Securitization: Case of Mortgage-Backed Securities

The securitization technique described in Chapters 4 and 5 has been applied widely in capital markets worldwide since its introduction in the U.S. residential mortgage market in the 1970s. In those two chapters, we discussed cash flow securitizations. In Chapter 7, we discussed synthetic collateralized debt obligations (CDOs). Here we look at synthetic mortgage-backed securitization, both commercial and residential. We will see that the transaction is based on exactly the same principles as CDOs and that deals are originated for roughly similar reasons as balance sheet static synthetic CDOs.¹

TRANSACTION DESCRIPTION

As has been observed in the synthetic CDO market, the European and U.S. commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) markets have witnessed a range of different synthetic deal structures. The first deal was issued in 1998. As with synthetic CDOs, synthetic mortgage-backed securities (MBS) deal structures involve the removal of the credit risk associated a pool of mortgages by means of credit derivatives, rather than by recourse to a true sale to a special purpose vehicle (SPV). The originator, typically a mortgage bank, is the credit protection buyer and retains ownership, as well as the economic benefit, of the assets. The credit risk is transferred to the investors, who are the protection sellers.

The main market for synthetic MBS to date has been ...