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securtization & mortgage loans by moula

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securtization & mortgage loans by moula

  1. 1. PRESENTATION ON SECURTIZATION & MORTGAGE LOANS A PART OF MERCHANT BANKING & FINANCIAL SERVICES
  2. 2. What is securitization? What is mortgages? Name some mortgages companies in India.
  3. 3. INTRODUCTION Securtization as a financing technique, is concerned with in securities, backed by pools of mortgage loans. The securities so created are known as Mortgages. Securitization refers to the process of turning assets into securities. When used in real estate, securitization means taking mortgages issued by the banks & other lenders & converting them into securities that can be sold to investors.  Financial instruments that can be readily bought & sold in financial markets, the way that stocks, bonds & futures contracts are traded.
  4. 4. Definition The process of trading in the securities that are created on the backing of pools of mortgage loans from banks & financial institutions is called asset securitization .  Mortgage loans include housing loans, car & truck loans, credit card receivables, trade receivables, etc  A technique whereby assets are converted into securities, which are in turn converted into cash on an ongoing basis, with a view to allow for increasing turnover of business & profit, is known as asset securitization.  The technique provides for flexibility in yield, pricing pattern, issue risk & marketability of instruments, which is to the advantage of both borrowers & lenders.
  5. 5. MORTGAGES COMPANIES IN INDIA ARE HDFC LTD LIC Housing finance LTD. ICICI Home finance company LTD. PNB Housing finance LTD. CAN Finance homes ltd. BOB Housing finance ltd.
  6. 6. Securitization Companies In India Are Asset Reconstruction Company India Ltd (Arcil) Mumbai. Aichemist Asset Reconstruction Company Ltd New Delhi. Reliance Asset Reconstruction Company Pvt Ltd. Mumbai.
  7. 7. SECURITISATION OF FINANCIAL ASSETS Why Securitisation? 1. A convenient mechanism to suit changing needs of borrowers and lenders 2. Matches supply of funds with demand demands for funds through floating negotiable securities
  8. 8. SECURITISATION OF FINANCIAL ASSETS Genesis and Growth: 1. Severe financial crisis faced by certain states in US during 1969-70 2. Federal government restriction on inter-state lending and borrowing 3. Raised funds from surplus states by issuing instruments backed by mortgaged properties
  9. 9. SECURITISATION OF FINANCIAL ASSETS Elements of Securitisation: 1. Conversion of existing illiquid assets like loans, advances and receivables into tradable security 2. Reconverting them into fresh assets through capital market operations
  10. 10. SECURITISATION OF FINANCIAL ASSETS Benefits of Securitisation: 1. Separates the credit risk of the assets from the credit risk of the Originator 2. Illiquid assets converted into marketable securities and thus provide alternate funding source
  11. 11. SECURITISATION OF FINANCIAL ASSETS Benefits of Securitisation : 3. Remove assets from balance sheet and thus improve capital adequacy 4. Dependability of cash flows from the assets as signified by the ageing of the portfolio
  12. 12. SECURITISATION OF FINANCIAL ASSETS The Players and their Role: 1. Originator: An entity making loans to borrowers or having receivables from customers 2. Special Purpose Vehicle: The entity which buys assets from Originator and packages them into security for further sale 3. Credit Enhancer: To reduce the overall credit risk of a security issue by providing senior subordinate structure, over-collateralization or a cash collateral
  13. 13. SECURITISATION OF FINANCIAL ASSETS The Players and their Role: 4. Credit Rating Agency: To provide value addition to security 5. Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription 6. Obligors: Whose debts and collateral constitute the underlying assets of securitisation 7. Investor: The party to whom securities are sold
  14. 14. SECURITISATION OF FINANCIAL ASSETS Requirements for Eligible Collaterals: 1. Assets to be securitised to be homogeneous in terms of: 2. Underlying assets 3. Maturity period 4. Cash flow profile
  15. 15. SECURITISATION OF FINANCIAL ASSETS Eligible Collaterals: 1. Housing finance 2. Term loan finance 3. Car loan 4. Credit card receivables 5. Export credit etc...
  16. 16. SECURITISATION OF FINANCIAL ASSETS Structure of Securitisation: Pass Through Certificates: – Sale of asset to SPV – Investors purchase interest in the assets of SPV – Cash flow (interest and principal) passed through as and when occurred without any reconfiguration – Payments made are most often on monthly basis
  17. 17. ANCILLARY SERVICE PROVIDER SPV RATING AGENCY STRUCTURER OBLIGOR ORIGINATOR Issue Of Securities INVESTORS Interest &Principal Sale Of Assets Consideration For Asset Purchased Credit Rating Of Securities Subscription Of Securities
  18. 18. SECURITISATION OF FINANCIAL ASSETS Securitisation Process: 1. Selection of assets by the Originator 2. Packaging of designated pool of loans and advances (assets) 3. Underwriting by underwriters 4. Assigning or selling to of assets to SPV in return for cash 5. Conversion of the assets into divisible securities
  19. 19. SECURITISATION OF FINANCIAL ASSETS 6. SPV sells them to investors through private placement or stock market in return for cash 7. Investors receive income and return of capital from the assets over the life time of the securities 8. The risk on the securities owned by investors is minimized as the securities are collateralisied by assets 9. The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and SPV
  20. 20. SECURITISATION OF FINANCIAL ASSETS Legislations / Enactments and their impact on securitisation transactions: The Companies Act 1956 affect the SPV in the following manner: 1. Framing of Memorandum and Article of Association of the SPV and formation of SPV as a Limited Company 2. Management of affairs viz. Board of Directors, Borrowing Powers / delegation of powers for recovery of receivables etc. 3. Share Capital Structure 4. Issuance of Bonds / Debentures etc. to investors (whether by public issue or private placement) and servicing the investors
  21. 21. Features of securtization Marketability Merchantable quality. Wide distribution. Homogeneity. Commoditization. .
  22. 22. Need for securtization. Helping small investors. Facilitating liquidity. Utility of instruments. Special purpose vehicle(SPV).
  23. 23. Asset securtization Mechanism Origination. Asset identification & pooling. Security creation. SPV’S task Security issue Security purchase. Receipt of benefits. Rating & trading.
  24. 24. PURPOSES To improve the return on capital. To raise finance when other forms of finance are unavailible. •To improve return on assets, •To diversify the sources of funding which can be assessed.
  25. 25. Economic functions of securtization Creating financial market. Diversification. Promoting savings. Diversified risks. Focus on use of resources
  26. 26. Limitations of securtizations. Debility to central bank, Heightened volatility. Pressure on profitability.
  27. 27. By Moula hussain K

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