Chapter 8

Securitizations
 Securitizations

• Accounting for securitizations

 According to the text, under SFAS No. 140 (2000),
three issues for users of financial reports
 Despite SFAS No. 140’s (2000) focus on control, it is not
clear that issuers are affected substantially by whether
surrender control over the underlying financial assets.

 Certain retained interests concentrate the risk of the

underlying financial assets.

 Some retained interests are sensitive or illiquid

instruments that require expertise and judgment to value.
 Securitizations

• Motivations for and alternatives to securitizations

 According to the text:
 Issuers have various motivations for securitizations.
 Securitizations provide funds for future organizations of
financial assets.
 They allow issues to diversify their holdings of financial
assets and to transfer or transform the risk of those
assets in diverse ways.
 Loan sales and syndications are common alternatives to
securitizations.
 Loan syndications can be structured legally as
participations or assignments.
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 Residential Mortgages
 Was the first and remains the most important
type or securitized financial asset.
 Residential mortgage securitizations are
sponsored.
 Ginnie Mae and other government-sponsored
enterprises are the sponsors of securitizations.
 Ginnie Mae sponsors but does not issue
securitizations of mortgages.
 Ginnie Mae provides timing insurance.
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 Securitizations of other financial assets

 “Are important to a wide class of financial
institutions that securitize an increasingly wide
range of loans, securities, and lease
receivables.”
 Almost any type of financial asset can be
securitized.

 Asset-backed commercial paper

 “Asset-backed commercial paper (ABCP) is a
type of short-term financing (less than 270 days
in the United States) that is employed by both
financial institutions and nonfinancial firms.”
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• Securitization structures
 Pass-through securitizations
 Simplest form of securitization

 Estimation of prepayment risk

 Tranched securitizations
 Yield distinct tranches of securities with different
prepayment, interest rate, credit, or other risk.
 Collateralized mortgage obligations (CMOs)
 Tranched securitizations for residential
mortgages
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• SFAS No. 140

 “Defines transfers of financial assets as
conveyances of noncash financial assets by and to
someone other than the issuer of the assets.”
 These transfers include securitizations.

 Scope exclusions
 Transfers of some types of financial assets.
 “Specifically, transfers of financial assets associated
with pension and other postemployment benefit
plans, leveraged leases, and insurance contracts are
excluded.”
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 Three concepts to determine if the transfer is a

sale or secured borrowing:
 Financial components concept
 Reflects the sequence of transactions
leading up to a given position.
 Control concept
 Reflects legal and effective notions.
 Fair value concept
 “Uses fair value in two ways in accounting
for transfers of financial assets for which the
transferor has surrendered control over the
assets as sales.”
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 Disclosures
 Requires minimal disclosures for
securitizations.
 According to the text, the issuer must disclose
 A description of the economic characteristics of
securitizations, including the nature of each retained
interest.
 The policies used to account for and the
methodology and significant assumptions used to
estimate the fair values of each retained interest, or
the reason why it is not practicable to estimate their
fair value.
 Sensitivity tests indicating the hypothetical change in
the fair value of each retained interest or two or more
unfavorable changes in each significant assumption
used to estimate its fair value.
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 Disclosures
 The gain or loss on sale during a period.
 The various cash flows between the issuer and the
securitization SPEs during the period.
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• Financial analysis issues

 The text states, three financial analysis issues
 Is sale accounting applied when the issuer still
bears most of the risks and rewards on the
financial assets?
 Are the amounts recorded for retained interests
and thus gains on sale appropriate?
 Are these gains persistent, or are they timed to
manage income?
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• Servicing and prepayment-sensitive securities

 Servicing rights
 “Are recognized separately from the remainder
of the financial assets only when those rights
are retained in a securitization or other transfer
or are purchased in the open market.”
 Servicing rights are most often assets.
 Servicing liabilities occur when the cost of
servicing exceeds the fees.