TERIM Model of Securitization: How is Securitization Done ?
Posted by Category: Finance, Securitization.
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TERIM Model of Securitization
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How is Securitization Done ?
. . In the earlier posts we had discussed what is Securitization, why it is required, and some of the terms related to Securitization like CDO/ ABS/ CLO/ CDS, SPV/ SPE/ SPT etc. Now its time to understand all the steps involved in carrying out any securitization. . All the steps involved in any securitization (modern or traditional) can be technically classified into 5 steps which have to occur in the given order one after another. These 5 steps are parts of the model called TERIM: . 1. T- Transfer 2. E- Enhance 3. R- Rate 4. I- Issue 5. M- Manage. To explain the process completely I have written separate notes on each of them, but those who are in a hurry, here is a short summary of each step (for detailed posts click on step headings below). . .
Transfer
As we discussed earlier the securtization initially started with the sole purpose of waving the loans (asset backed mortgaged loans) from the balance sheets of the bank where these loans were originated. Also the bank need to be isolated from any risk arising from the failure of these loans. Also the asset that are linked with this loan need to be backed up against any future claims that comes on the bank. For this purpose a Special Purpose Vehicle (SPV) is created, and these loans are TRANSFERRED from the balance sheets of the bank to that of the SPV’s.
For more information on this step read the post: – TERIM Step 1: Transfer.
Enhance
These asset backed loans after being detached from their originating bank, become very risky at this stage, and hence are not investment worthy. So in order to reduce the risk associated with them they have to be ENHANCED. Enhancement is like an Insurance in which you pay a premium to an Insurance firm for covering any damages that arise due to the failure of these loans.
For more information on this step read the post: – TERIM Step 2: Enhance.
. .Rate
In order to recognize these loans as investment worthy, they require to a credit rating above B (AAA to A). After getting Insurance/ Enhancement for these loans in the above step we have reduced some risks from them, and now we get them rated by a rating agency like Moody’s/ S&P etc. Only after they rate them as AAA, AA, A can they be securitized.
For more information on this step read the post: – TERIM Step 3: Rate.
. .Issue
We have carried out so many procedures just to securitize out asset backed loans (to get asset backed securities from them). This is finally the step where Securities are ISSUED from the above rated (& enhanced) mortgage backed loans to the the investors. This although sounds simple but is a aggregation of several other steps which will be covered in the dedicated post (link below).
For more information on this step read the post: – TERIM Step 4: Issue.
. .Manage
If you have already gone through the detailed procedure involved in the above 4 steps, you must have realized that several routine steps are to be carried out every year for the maintainence of the original asset backed loans to ensure that creditors pay their investments on time, and the same is being transferred into the accounts of the concerned parties. Despite after so many steps the loan has been fragmented into numerous securities, some body is required to carry out the above stated and many other steps till the loan does not reach maturity. In short somebody is required to MANAGE these securities and the original loan
For more information on this step read the post: – TERIM Step 5: Manage
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.Other Posts Related to Securitization:
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3. What is a SPV/SPT/ SPE/SPC ?
4. TERIM model of Securitization.
5. Advantages and Disadvantages of Securitization for different Parties ?
6. How Securitization led to the Sub Prime Crisis ?
7. What are CDO2 (CDO Squares or CDO Squared), and CDO3 (CDO Cubes or CDO Cubed) ?
8. What is Tranching ?
9. Some Global facts and figures related to Securtization.
10. Problems with Structured Finance.
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