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An Overview of mortgage securitization and the financial crisis

An Overview of mortgage securitization and the financial crisis. Dheeraj Sinha Gaurav Walawalkar Manisha Salian. How it works ?. 2. Lemon Loan, Hot Potato Theory. Gaussian Copula.

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An Overview of mortgage securitization and the financial crisis

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  1. An Overview of mortgage securitization and the financial crisis Dheeraj SinhaGauravWalawalkarManishaSalian

  2. How it works ? 2 Lemon Loan, Hot Potato Theory Gaussian Copula “Off Balance Sheet “ SIV, Bankruptcy Remote, True Sale, Credit Enhancement (Why/Types), Tranches, CDO(Types) Originator Borrower 1 3.2 Rating Agency Issuer/ SIV 3 4 Investor

  3. Formula that Wrecked the Economy Gaussian copula • Blamed as culprit in the credit crunch. Correlation Gaussian Copula Joint CDF

  4. Returns Distribution Where CDF = Cumulative Distribution Function

  5. Returns Distribution Where CDF = Cumulative Distribution Function

  6. Returns Distribution Where CDF = Cumulative Distribution Function

  7. Too many simplifying assumptions • Normally distributed return. • Correlation is not always flat and constant. • Same kind of MBS securities involved in securitization were directly correlated not inversely correlated.

  8. Impact of Securitization • Cost of Credit Securitization rate is inversely proportion with yield spread • Dispersion of risk Monetary policy shocks have negative and significant impact on banks loan growth. • Contagion or transmission of risks to cross markets.

  9. How it happened…. • http://www.youtube.com/watch?v=HSjEyOp2dEM

  10. Questions ?

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