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- October 30, 2021 at 1:29 pm #639476humaiParticipant
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In J2010 Qs examiner has written following answer for risk of securitization
Correlation risk: it is often assumed that defaults on the asset side of the securitisation process are uncorrelated. However, if a degree of positive correlation is present (such as defaulting car loans and repossessions) being positively associated with rising unemployment) then this can create higher than anticipated volatility in the receivables
Timing and liquidity risk: the question only refers to average returns which presumably consist of a mixture of repayments, interest and possibly the anticipated recovery from repossessions. Modelling the cash flow ‘waterfall’ is a difficult issue where the timing of the cash receipts is crucial in fulfilling the commitments to the various tranches.
Default and collateral risk: the success of the securitisation will be dependent upon the assessment of the quality of the loans made to car purchasers. Dealers selling cars are responsible for the primary credit assessment and tight controls are necessary
for ensuring that the loans are properly negotiated. Risk arises both in terms of default but also in the value of the vehicle on repossession.
In Moonstar co D15, examiner has written following answer for risk of securitization
Not all of the tranches may appeal to investors. The risk-return relationship on the subordinated certificates does not look very appealing, with the return quite likely to be below what is received on the C-rated loan notes. Even the C-rated loan note holders may question the relationship between the risk and return if there is continued uncertainty in the property sector.
If Moonstar Co seeks funding from other sources for other developments, transferring out a lower risk income stream means that the residual risks associated with the rest of Moonstar Co’s portfolio will be higher. This may affect the availability and terms of other borrowing.
It appears that the size of the securitisation should be large enough for the costs to be bearable. However Moonstar Co may face unforeseen costs, possibly unexpected management or legal expense
My Qs is that can we learn either any 1 of the above answer for risk of securitization, and will that answer be suitable for both of the above questions?October 30, 2021 at 5:25 pm #639491John MoffatKeymaster
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Yes, either. The examiners answers are only suggestions and very often there are other points that can be made and will still get the marks 🙂
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