1. HOME LOANS
SECURITISATION
Prepared by KELVIN SIPEYIYE

2. SECURITISATION FUNDING AND
THE SOUTH AFRICAN BANK

3. By definition securitisation is simply the process of taking a group of assets ie cash producing assets and pooling
them together and in the process transforming them into a security .
The perfect and most common example of a security would be a Mortgage Based Security ,basically a collection of
mortgages.
Even though Securitisation has been around for a couple of years, its inception in South Africa only came about in
1989 ,the first securitisation transaction of a home loan.
In 2001 ,the South Africa Reserve Bank ammended the regulations governing securitisation which in turn improved
the certainity prospects for investors immediately.
Commendably and notably as expected , the securitisation market started to grow.
Securitisation : An Intro

4. SECURITISATION:
KEY PURPOSES
What is RMBS
What is the role of a Ratings
Agency in an RMBS transaction
Identify the benefits for the
SELLER and the INVESTOR in
an RMBS transaction

5. KEY PURPOSE(S) OF SECURITISATION
FUNDING FOR A SOUTH AFRICAN
BANK
• ADDITIONAL SOURCE OF FUNDING FOR THE BANK
• MANAGEMENT OF REGULATORY CAPITAL THAT A BANK IS
REQUIRED TO HOLD
• MORTGAGES CAN BE ORIGINATED BY DIFFERENT
INSTITUTIONS
• SECURITISATION MOSTLY INVOLVES MORTGAGES AND THEY
CAN BE EASILY DISPOSED THROUGH SELLING TO VARIOUS
INVESTORS

6. RMBS
What is it ?
Abbreviation for Residential Mortgage-Backed
Security.It is basically cash yields paid to investors
emanating from cash payments by
homeowners.Cash flows from residential debt,in
our case right now it will obviously be from
mortgages.Others examples could be home equity
loans and subprime mortgages .RMBS are
governed largely by the interest and principal
agreement with lenders.

7. ROLE OF RATINGS AGENCY IN RMBS TRANSACTION
Overview
Ratings agencies assign ratings to any organization that
issues debt instruments, including private corporations
and all levels of government. Because investors need to
know they are receiving adequate compensation for the
risk they are taking by holding an investment, the ratings
the agencies issue are essential to the financial industry.
The interest rate attached to a debt is inversely related to
its level of risk. Therefore, since investors use the
opinions of rating agencies as metrics for the level of risk
attached to a debt instrument, credit ratings play a key
role in the interest rates of different debt securities.
Moody’s ,Standard & Poor’s and Fitch Ratings are the big
3 rating agencies and by far the most commonly spoken
about and trusted.Major role players in the subprime
mortgage crisis between 2007 and 2008 in the USA.

8. Ratings Agencies Help Good Institutions Get Better
Rates
Institutions with higher grade credit ratings are able to
borrow money at more favorable interest rates.
Accordingly, this rewards organizations that are
responsible about managing their money and paying off
their debt. In turn, they will be able to expand their
business at a faster rate, which helps stimulate the
economy’s expansion as well.
They Warn Investors of Risky Companies
Investors always want to know the level of risk associated
with a company. This makes rating agencies very
important, as many investors wish to be forewarned of
particularly risky investments.
They Provide a Fair Risk-Return Ratio
Not all investors are opposed to buying risky debt
securities. However, they want to know that they are going
to be rewarded if they take on a high level of risk. For this
reason, credit rating agencies will inform them of the risk
levels for every debt instrument and help ensure that they
are properly compensated for the level of risk they take
on.

9. They Give Institutions an Incentive to Improve
A poor credit rating can be a wake-up call for institutions
that have taken on too much debt or haven’t
demonstrated that they are willing to be responsible about
paying it back. These institutions are often in denial of
their credit problems, and need to be alerted of any
potential problems from an analyst before they make the
necessary changes.

10. RMBS TRANSACTION
BENEFITS TO SELLER
• GUARANTEED RETURNS
• TANGIBLE COLLATERAL
• THEY CAN SEE THEIR
MONIES WORTH
BENEFITS TO INVESTOR
• EASY REPAYMENT PLAN
• FLEXIBILITY
• CREATES CASH RESERVES

11. (2) SUB-PRIME CRISIS
• TIMELINE
• CAUSE(S)
• EFFECT
• IMPACT ON THE ENDURING GLOBAL CREDIT CRISIS
• 3 AMERICAN INVESTMENT BANKS(NON-EXISTANT) AFFECTED
BY THE SUB-PRIME CRISIS
• COMMENTS ON THE CONTINUING EUROPEAN DEBT CRISIS

12. SUB-PRIME CRISIS:INTRODUCTION
• LOAN GIVEN TO PEOPLE WITH BAD CREDIT RATING AND ARE INELIGIBLE
FOR A PRIME LOAN
• PRIME LOAN BEING THE NORMAL LOAN
• SUB-PRIME IS DERIVED FROM SUBORDINATE TO PRIMARY
• CHARACTERISTICS :
I. HIGH INTEREST RATES
II. POOR QUALITY COLLATERAL
III. LESS FAVOURABLE TERMS (COMPENSATION FOR HIGHER CREDIT RISK

13. SUB-PRIME CRISIS : TIMELINE
2000 - 2005
• Very low Interest Rates
• Property prices on a rising trend
• Sub-prime borrowers were able to meet obligations by selling the properties
or getting the properties refinanced
• Emergence of the ,´Housing Bubble’

14. SUB-PRIME CRISIS:TIMELINE cont’d
2006 – 2008
• Sub-prime borrowers started failing to pay their debts
• Securities held by mortgages lost value globally
• Global investors drastically reduced purchases of mortgage-backed debt and
other securities

15. SUB-PRIME CRISIS: TIMELINE cont’d
2008 – 2009
• Global recession hit the financial sector and the world
• Global recession cost nearly 9 million jobs between 2008 and 2009,second
only to the Great Depression of the 1920s
• Concerns about the volatility of US credit and financial markets led to
tightening credit around the world
• Economic growth became to slow in the US and Europe

16. SUB-PRIME CRISIS : CAUSES
• The American Dream , probably the main cause .Basically the American Dream was/is to
,´own a house’ . Houses are expensive and hence people needed to borrow money to get them.
• Perfect conditions in early 2000 since mortgage interest rates were low and there was also lower
monthly payments on borrowed money.
• Rising prices of homes also meant that lenders understood that homes make good collateral so
they were willing to participate
• This process and situation built momentum that triggered the crisis
• Low Interest Rates
• Increase in loan incentives
• Easy credit conditions

17. SUB-PRIME CRISIS : EFFECTS
• Stock markets tanked. Crisis caused panic in the financial markets and investors sold
out and withdrew their money ,resulting in sharp drop in prices.
• Many banks,mortgage lenders and investment trusts suffered significant losses
• Credit got tighter because banks became extremely careful parting with their capital
and decreased lending activities to both businesses and private households ,even to
each other
• Job losses especially in the financial sector

18. SUB-PRIME CRISIS : RELATIONSHIP
WITH THE ENDURING GLOBAL
CREDIT CRISIS
• CAN ALSO BE TERMED THE GLOBAL FINANCIAL CRISIS
• FIRST MAJOR SIGNS NOTABLE BETWEEN 2007 AND 2008
• PROBABLY EXACERBATED BY THE SUB-PRIME CRISIS TOO
• INTENSIFIED AROUND 2009
• POSITIVE RELATIONSHIP BETWEEN SUB-PRIME CRISIS AND GLOBAL CREDIT
CRISIS
• BECAUSE LENDERS HAD REDUCED LIQUIDITY ,REDUCING ABILITY TO MAKE
NEW LOANS OR REFINANCE EXISTING LOANS,CREDIT BECAME A CRISIS
• OTHER SOURCES CLASSIFY SUB-PRIME CRISIS AS PART OF THE GLOBAL CREDIT
CRISIS,TERMED PHASE 1 OF THE GLOBAL CREDIT CRISIS

19. SUB-PRIME CRISIS : IMPACT ON
AMERICAN INVESTMENT BANKS
LEHMAN BROTHERS
• 4TH LARGEST INVESTMENT BANK IN THE USA BEFORE DECLARING BANKRUPTCY
• RENDERED SERVICES IN INVESTMENT BANKING,RESEARCH,FIXED INCOME SALES AND
TRADEPRIVATE EQUITY,PRIVATE BANKING AND INVESTMENT MANAGEMENT
• HUGE STOCK LOSSES
• FILED FOR BANKRUPTCY AFTER MASSIVE EXODUS OF CLIENTS (LARGEST IN US
HISTORY)
• CREDIT RATINGS AGENCIES DEVALUED ALL THEIR ASSETS
• NO BAILOUT BY FEDERAL GOVERNMENT

20. IMPACT ON AMERICAN INVESTMENT
BANKS cont’d
MERRILL LYNCH
• ANNOUNCED WRITE DOWN OF 8,4BILLION LOSSES LATE 2007
• LOSSES ASSOCIATED WITH NATIONAL HOUSING CRISIS
• REMOVED ITS CEO AT THAT TIME
• MID 2008 : ANNOUNCED 4.9BILLION 4TH QUARTER LOSSES FROM BAD
INVESTMENTS AND DEFAULTS IN THE ONGOING MORTGAGE CRISIS
• DECLINE IN STOCK PRICES
• LOST ABOUT 52MILLION A DAY BETWEEN JULY 2007 AND JULY 2008
• LATER ACQUIRED BY BANK OF AMERICA FOR 50BILLION

21. IMPACT ON AMERICAN INVESTMENT
BANKS cont’d
BEAR STEARNS INVESTMENT BANK
• SPECIALISED IN CAPITAL MARKETS,INVESTMENT BANKING AND WEALTH
MANAGEMENT
• INVOLVEMENTS IN SECURITIZATION
• ISSUES OF LARGE AMOUNTS OF ASSET BACKED SECURITIES
• INVESTOR LOSSES INCREASED IN 2006 AND 2007
• BANK COULD NOT BE SAVED EVEN BY THE FEDERAL RESERVE BANK OF
NEW YORK
• LATER ACQUIRED BY JP MORGAN FOR 1,2BILLION

22. EUROPEAN DEBT CRISIS : COMMENTS
• ALSO KNOWN AS THE EUROZONE CRISIS
• MULTI YEAR DEBT CRISIS IN THE EUROPEAN UNION THAT EVOLVED AROUND LATE 2009
• MOST AFFECTED COUNTRY HAS BEEN GREECE
• GREECE TOGETHER WITH PORTUGAL,SPAIN AND IRELAND HAVE ALL AT LEAST ONCE FAILED TO REPAY THEIR
GOVERNMENT DEBT OR TO BAIL OUT OVER INDEBTED BANKS WITHOUT THE ASSISTANCE OF OTHER EUROZONE
COUNTRIES
• FISCAL POLICY CHOICES RELATED TO GVT REVENUES AND EXPENSES
• PRIVATE DEBT EG PROPERTY BUBBLE
• GLOBALISATION OF FINANCE
• EASY CREDIT CONDITIONS (2002 – 2008)
• FINANCIAL CRISIS(2007 – 2008)
• INTERNATIONAL TRADE IMBALANCES
• GREAT RECESSION (2008 – 2012)

23. BASEL : INTRO TO THE BASEL ACCORD
• AGREEMENTS SET BY THE BASEL COMMITTEE ON BANKING
REGULATIONS AND SUPERVISION WITH REGARDS TO RISK –
CAPITAL,OPERATIONAL,MARKET
• INTENTING TO ENSURE THE FINANCIAL INSTITUTIONS HAVE
ENOUGH CAPITAL ON ACCOUNT TO MEET OBLIGATIONS AND
UNEXPECTED LOSSES

24. BASEL : STRUCTURE

25. BASEL I
• INTRODUCED IN 1988
• ALL ABOUT PROMOTING CAPITAL ADEQUACY AND FINANCIAL
INSTITUTIONS
• CATEGORISES ASSETS OF A FINANCIAL INSTITUTION INTO 5
RISK CATEGORIES ie 0%,10%,20%,50% &100%
• BANKS OPERATING INTERNATIONALLY ARE REQUIRED A RISK
WEIGHT OF 8% OR LESS

26. BASEL II
• FIRST PUBLISHED IN 2004
• IMPLEMENTED IN 2008
• FOCUSES ON 3 MAIN AREAS #PILLARS ie MINIMUM CAPITAL
REQUIREMENTS,SUPERVISORY REVIEW & MARKET DISCIPLINE
• STRENGTHEN INTERNATIONAL BANKING

27. BASEL III
• FIRST VERSION PUBLISHED LATE 2009
• IT WAS A RESPONSE TO THE CREDIT CRISIS
• BANKS TO MAINTAIN PROPER LEVERAGE RATIOS AND TO
MEET CAPITAL REQUIREMENTS
• REFORM MEASURES DESIGNED TO IMPROVE
REGULATION,SUPERVISION AND RISK MANAGEMENT WITHIN
THE BANKING SECTOR

28. COMMITTED LIQUIDITY FACILITY
• BASEL III FRAMEWORK REQUIRES BANKS TO ADHERE TO A NEW
LIQUIDITY COVERAGE RATIO
• IN 2012 RESERVE BANK APPROVED THE PROVISION OF A
COMMITTED LIQUIDITY FACILITY TO COMMERCIAL BANKS TO
ASSIST THEM IN MEETING THEIR LIQUIDITY COVERAGE RATIO AS
THERE IS LIMITED AVAILABILITY OF HIGH QUALITY LIQUID ASSETS
IN SOUTH AFRICA
• IT ALSO STATED THAT APPROVED STATUTORY CASH RESERVES TO
BE INCLUDED IN HQLA FOR PURPOSES OF CALCULATING LCR

29. SUMMARY
• RMBS - RESIDENTIAL MORTGAGE-BACKED SECURITY
• CASH YIELDS FROM CASH PAID BY HOMEOWNERS TO INVESTORS
• SUB-PRIME CRISIS
• LOAN GIVEN TO PEOPLE WITH BAD CREDIT
• CHARACTERISED BY :
• HIGH INTEREST RATES
• POOR QUALITY COLLATERAL
• LESS FAVOURABLE TERMS
• CAUSES :
• LOW INTEREST RATES
• RISE IN LOAN IN LOAN INCENTIVES
• EASY CREDIT CONDITIONS
• AMERICAN DREAM (OWNING A HOUSE)

30. SUMMARY cont’d
• EFFECTS OF SUB-PRIME CRISIS
• PANIC IN FINANCIAL MARKETS
• INVESTORS SOLD OUT
• DROP IN SHARE PRICES
• CREDIT GOT TIGHTER
• LOSSES FOR BANKS AND MORTGAGE LENDERS
• JOB LOSSES

31. SUMMARY cont’d
• IMPACT OF SUB-PRIME CRISIS ON BANKS
• LEHMAN BROTHERS DECLARED BANKRUPTCY
• MERRILL LYNCH WAS ACQUIRED BY BANK OF AMERICA FOR 50 BILLION
• BEAR STEARNS INVESTMENT BANK SUFFERED INVESTOR LOSSES AND GOT ACQUIRED
BY JP MORGAN FOR 1.2 BILLION
• EURO DEBT CRISIS
• TIMELINE: EASY CREDIT CONDITIONS (2002 – 2008)
• FINANCIAL CRISIS (2007 – 2008)
• INTERNATIONAL TRADE IMBALANCES
• GREAT RECESSION (2000 – 2012)

32. SUMMARY cont’d
• BASEL ACCORD
• AGREEMENTS BY BASEL COMMITTEE ON BANKING REGULATIONS
AND SUPERVISION WITH REGARDS TO RISK ie CAPITAL,MARKET &
OPERATIONAL
• BASEL I,BASEL II,BASEL III
• BASEL III WAS INITIATED BY THE RECENT FINANCIAL CRISIS IN 2009
• COMMITTED LIQUIDITY FACILITY
• APPROVED IN 2012 BY RESERVE BANK TO ASSIST COMMERCIAL
BANKS MEET THEIR LIQUIDITY CREDIT RATIO