Market Overview

2.3.1 History of Securitisation

The roots of Mortgage-Backed Securities in the United States go back to the emergence of the secondary mortgage market and the foundation of the Federal National Mortgage Association (Fannie Mae) during the 1930’s. Fannie

143 Cf. Roever and Fabozzi (2003), p. 7.

Mae was founded to purchase residential mortgages insured by the Federal Housing Administration (FHA).¹⁴⁴

This was the beginning of the secondary mortgage market and the foundation for the creation of Mortgage-Related and Asset-Backed Securities. However, the first issuance of securities was not until the 1950’s and it did not take off until the 1970’s, when the MBS program of the newly founded Government National Mortgage Association (Ginnie Mae) rapidly became the preferred means of funding single-family mortgages.¹⁴⁵

The Securitisation of Commercial Mortgage Loans into Commercial Mortgage-Backed Securities (CMBS) only evolved in the mid-1980’s during the Savings &

Loans crisis. At the end of the 1980’s the Resolution Trust Corporation (RTC) took over the thrifts’ commercial real estate assets and started securitising the real estate loans into CMBS. The RTC held huge asset pools and was therefore able to give high guarantees to get the market started and the securities marketable. The Corporation had tapped a new funding source and overall had a very important effect on the future development of Commercial Real Estate Securitisation. Today the secondary market for mortgage loans in the USA is highly developed. ¹⁴⁶

Securitisation or Asset Securitisation is not entirely new in Germany. As far as the German Pfandbrief is considered/recognized as a form of Asset-Securitisation, the historic roots go back to the 18th century, the time as the first Pfandbrief concept was invented.¹⁴⁷ In fact, the concept is precisely 235 years old. Frederick the Great laid the foundation for the issuance of Pfandbriefe with the Cabinet Order of August 29, 1769. The goal of this order was to help the landed gentry obtain cheaper agricultural mortgages by enabling the estates to issue Pfandbriefe on the basis of the mortgages granted. The mortgages serve as a cover for the Pfandbrief holders as are the issuing estates on a subsidiary basis. This basic concept of securitising mortgages has endured until today -

144 Cf. Brueggeman and Fisher (2001), p. 495.

145 Cf. Falcon (2003), p. 29; Kendall and Fishman (2000), p. 6.

146 Cf. Baum (2000), p. 45.

147 Cf. Schiereck and Rauch (2002), p. 174.

the Pfandbrief now has become an international capital market product with an outstanding volume of around €1.1 trillion.¹⁴⁸

2.3.2 Asset Differentiation

There is a difference between the asset that is backing the Securitisation and additional collateral that is required by investors. This is due to the fact that some assets refer to cash flows that will only be originated in the future, however, the investors want to have some kind of security in case those cash flows do not come in the future. So in the case of the Securitisation of future real estate rental cash flows, the property itself has to function as collateral, in addition to the future rental receivables. Another form of additional collateral could be a mortgage on the property.

This fact leads to an overlapping between Commercial Mortgage-Backed Securities and Real Estate Asset-Backed Securities. Even though Real Estate Asset-Backed Securities securitise real estate cash flows and Commercial Mortgage-Backed Securities securitise real estate loan receivables (i.e. interest and principle on a real estate loan), both might be secured by a mortgage. In both cases the securitised assets are secured by a mortgage and in both cases the mortgage serves as additional collateral for the investors. Nevertheless in Europe the case can be made that they differ from each other.

The matrix below clarifies the relationships between the different asset classes.

Here one can differentiate between who originates the transactions and assets, and between real estate and non-real estate assets. On the real estate side there are Mortgage-Backed Securities (MBS) and Real Estate Asset-Backed Securities (RE ABS), while on the non-real estate side the asset classes are comprised of Collateralized Debt Obligations (CDO) and Asset-Backed Securities in a narrower sense (ABS i.n.S.).

Whereas Mortgage-Backed Securities are mainly bank originated, Real Estate Securitisation is non-bank originated, i.e. the sellers of the real estate assets to be securitised are no banking institutes, but corporates or governments.

However, as discussed above the two asset classes overlap, since there are

148 Cf. Hagen (2003), p. 12; Schiereck and Rauch (2002), p. 1.

transactions that are backed by real estate cash flows, but that are originated by banks and structured as secured loans. These transactions fall into the category of Real Estate Securitisation as well as into CMBS.

Assets

Non-Real Estate Real Estate

Bank Originator

Non-Bank Collateralized Debt

Obligation (CDO)

Asset-Backed Security i.n.S. (ABS)

Real Estate Securitisation (RE ABS)

Mortgage-Backed Securities (RMBS & CMBS)

Figure 10: Asset Differentiation¹⁴⁹

Asset-Backed Securities i.n.S. overlap with Real Estate Asset-Backed Securities, because there are receivables that belong into both categories, such as lease receivables.

Collateralized Debt Obligations (CDO) overlap with all three other asset classes, since it is possible to securitise tranches (i.e. notes) from other Asset-Securitisations into a CDO.¹⁵⁰

2.3.3 Synthetic vs. True Sale Securitisation

When securitisation experts talk about assets or receivables in the context of a securitisation, they generally mean the right of one person to demand payment from another person under an existing contractual relationship, eg a mortgage loan or lease contract. The focus, therefore, is not on the contractual relationship between the originator and the customer, but on the monetary claim

149 Following Rügemer and Siemes (2002), p. 773.

150 Cf. Erturk and Gillis (2004), p. 2.

originated under an existing contract. The treatment of this claim differs in true sale and synthetic securitisations.¹⁵¹

Synthetic Structures¹⁵²

In a synthetic securitisation, the underlying asset is not transferred from the originator to the purchaser. Instead, the credit risk relating to the asset is isolated and transferred to the purchaser by way of a credit default swap (or similar arrangement), but the asset itself remains with the originator and on its balance sheet. The main reason for such an exercise is to achieve regulatory capital relief for the originator. However, the disadvantages of synthetic structures are apparent. The asset will not be removed from the balance sheet and these structures are only of interest to credit institutions that are concerned about regulatory capital relief.

True Sale Structures¹⁵³

In contrast, in a true sale the asset must be isolated from other assets and the originator’s estate. A true sale is a necessary requirement for removing the assets from the originator’s balance sheet and, in the case of banks, achieving regulatory capital relief.

151 Cf. Kreppel (2003), p. 273.

152 Cf. Anonymous (2002j), p. 58; Böhringer (2001), p. 53.

153 Cf. Flämig (2003b), p. 17; Frühauf (2003), p. 17; Klüwer (2001), p. 35.