HOME EQUITY LOAN

2007-11-10T07:15:00.000-08:00

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

Closed end home equity loanThe borrower receives a lump sum at the time of the closing and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity loans. However, state law governs in this area; for example, Texas (which was, for many years, the only state to not allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.
Open end home equity loanThis is a revolving credit loan, also referred to as a home equity line of credit (HELOC), where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.
Typically, the interest rate is based on the Prime rate plus a margin.

Home Equity Loan FeesHere is a brief list of possible fees that may apply to your home equity loan: Appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs are often included in loans. Surveyor and conveyor or valuation fees may also apply to loans, some may be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.

E-Loan

2007-11-06T06:43:00.001-08:00

E-Loan, Inc.
Type Private
Founded 1997
Founder Janina Pawlowski and Chris Larsen
Headquarters Pleasanton, CA
Key people Mark Lefanowicz, President
Industry Financial Services
Products Auto Loans
Mortgage Loans
Mortgage Refinance Loans
Home Equity Loans
Savings & CDs
Employees 950
Parent Popular, Inc.
Slogan Radically Simple
Website www.eloan.com

E-Loan, Inc. is a financial services company that offers home mortgage, home equity, and auto loans,

along with online high yield savings and certificates of deposit (CDs).

E-LOAN® is currently headquartered in Pleasanton, CA, and employs more than 950 people. As of October

2006, the company has funded over $32 billion in loans.

History

Founded in 1997 by Janina Pawlowski and Chris Larsen, E-Loan, Inc. was established to provide customers

with access to mortgage loans over the Internet.

As the company continued to evolve, more products and enhancements were introduced. In 1998, E-LOAN

launched E-Track, a proprietary system that allows borrowers to securely check the status of their loans

online.

In 2000, E-LOAN became the first company to provide consumers with free access to their credit scores,

allowing customers to check for possible incidents of identity theft or erroneous entries of credit

debt. This was introduced at a time when many financial companies were reluctant to release this

information.

Buoyed by this success, but still determined to improve public credit disclosures throughout the nation,

Larsen helped form “Californians for Privacy Now” to lead the fight for stricter financial privacy

protection. After collecting over 600,000 signatures, the measure was placed on the California ballot

and passed into law in 2003.

Ownership of the company changed in 2005 when Popular, Inc. acquired E-Loan, Inc.

In 2006, E-LOAN branched out into online savings accounts and CDs, promising their CD rates would be

among the highest in the nation.

Core Products

Mortgage Loans

E-LOAN offers several different types of mortgages, including 40, 30, 20 and 15-year loans.

Other loan choices include those with zero down or no PMI (Private Mortgage Insurance). These remain

popular among customers financing a home loan in locations where housing costs remain above the national

average.

Refinance Loans

E-LOAN offers refinancing options for customers searching for a better rate, extra cash, or both.

Customers can apply for a mortgage refinance with a cash-out refinance or a home equity loan.

E-LOAN provides two types of home equity loans:

* A home equity line of credit, also known as a HELOC, which extends a credit line that can be

accessed whenever the borrower chooses.
* A home equity loan or “second mortgage,” which provides cash in a lump sum while retaining the

borrower’s existing first mortgage.

Vehicle Loans

E-LOAN also provides car, truck, and motorcycle loans for both dealers and non-dealers (private party).

Loans for lease buyouts are also available, along with auto refinance loans for borrowers searching for

better rates than their current car loans.

E-LOAN provides approved vehicle loan applicants with a “PowerCheck®,” which works much like a regular

check.

Online Savings and CDs

Differing from its other loan products, E-LOAN also offers high yield savings and CDs. Current rates are

listed on the company’s Web site at http://www.eloan.com/savings

Awards

Since its inception, E-LOAN has garnered various awards for privacy and ease-of-use. Some of these

include:

* Best Overall in Best Practices in 2007 Mortgage Scorecard by Keynote_Systems
* Rated # 1 in Web Excellence for Mortgage (July 2006)
* Top Financial Company for Privacy by TRUSTe and the Ponemon Institute (March 2006)
* Ranked #3 in Privacy by The Customer Respect Group (August 2005)
* Highest Customer Respect Rating (March 2005)
* Easiest Site For Consumers to Use (March 2004)
* Certificate for E-LOAN as an Upfront Mortgage Lender
* COMPUTERWORLD’s Safest Places On the Web article

External Links

* www.eloan.com (Homepage)
* savings.eloan.com/savings (Savings & CDs)
* www.eloan.com.au (E-LOAN Australia Homepage: Independently operated)

Equity stripping

2007-11-06T06:42:00.002-08:00

Equity stripping, also known as equity skimming or foreclosure rescue, is any of various predatory real

estate practices aimed at vulnerable, often low-income, homeowners facing foreclosure in the United

States. Often considered a form of predatory lending, equity stripping began to spring up in the early

2000s and is conducted by investors or small companies that take properties from foreclosed homeowners

in exchange for allowing the homeowner to stay in the property as a tenant. Most often, these

transactions take advantage of uninformed, low-income homeowners. Because of the complexity of the

transaction and false assurances given by rescue artists, victims are often unaware that they are giving

away their property and equity. In recent years, several states have taken steps to confront the more

unscrupulous practices of equity stripping. Although "foreclosure reconveyance" schemes can be

beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and

egregious or unmeetable terms. [1]

Term and definition

The term "equity stripping" has sometimes referred to subprime lending refinance practices that charge

excessive fees thereby "stripping the equity" out of the home. The practice more often describes

foreclosure rescue scams. While most do not consider equity stripping a form of predatory lending per

se, equity stripping is related to traditional forms of that practice. Subprime loans targeted at

vulnerable and unsophisticated homeowners often lead to foreclosure, and those victims more often fall

to equity stripping scams[2]. Additionally, some do consider equity stripping, in essence, a form of

predatory lending since the scam works essentially like a high-cost and risky refinancing. Equity

stripping, however, is conducted almost always by local agents and investors, while traditional

predatory lending is carried out by large banks or national companies.[3]

Market conditions

Trends in the United States economy have led to the growing market for foreclosure services and equity

stripping. Property values have increased dramatically from 2000-2005 [4]. However, with an increase in

values, foreclosure rates also peaked in 2001 and remained high[5], leaving numerous foreclosed

homeowners with substantial equity. With these trends, a market emerged to tap into this equity.

Scam Elements

Foreclosure

A homeowner falls behind on his mortgage payments and enters foreclosure. Foreclosure notices are

published in newspapers or distributed by reporting services to investors and rescue artists. Foreclosed

homeowners also contact lenders to inquire about refinancing options.

Solicitation

Rescue artists obtain contact information for foreclosured homeowners and make contacts personally, by

phone, or through direct mail. Some lenders and brokers will also refer foreclosed homeowners that do

not qualify for new loans to rescue artists for a commission. Rescue Artists offer the foreclosed

homeowner a "miracle refinancing" and/or say they can "save the home" from foreclosure.

Acquisition

Rescue artists arrange the closing (often delaying the date until shortly before the homeowner's removal

in order to create urgency). At the closing, the homeowner transfers title (possibly unwittingly) to the

rescue artist or an arranged investor. The rescue artist or arranged investor pays off the amount owed

in foreclosure to acquire the deed, and inherits or is paid any portion of the homeowner's remaining

equity. The rescue artist will reconvey the property back to the homeowner in the form of a lease or a

contract for deed.

Result

The homeowners remain in the home and pay rent or contract-for-deed payments (often higher than their

previous mortgage payments). They inevitably fall behind, and are evicted from their homes with very

little of their equity.

Legal Remedies

State Protections

Several states have passed laws to prevent and/or regulate equity stripping schemes. Minnesota and

Maryland passed laws in 2005 aimed at "foreclosure reconveyance" practices[6] . The state laws require

adequate disclosures, capped fees, and an ability to pay on behalf of the consumer. The statutes also

ban certain deceptive and unfair practices associated with equity stripping.[7]

Other laws regulating the activity of "foreclosure consultants" have been passed in California, Georgia,

and Missouri[8].

Additionally, state fraud and "unfair and deceptive trade practices" acts can be used when rescue

artists have misrepresented their services and the end result.[9]

Federal Protection

Since foreclosure rescue schemes are essentially refinancing loans secured by the home, consumers can

often successfully argue that disclosures required for all loans by the federal Truth in Lending Act and

the Home Ownership and Equity Protection Act are necessary[10].

Non-Predatory Foreclosure Rescue

In certain circumstances, foreclosure rescue services can be beneficial to the consumer. When

refinancing options are exhausted and foreclosure proceedings have led to near eviction, a foreclosure

rescue transaction with moderate fees and full disclosures can be legally and ethically executed.

A consumer can face removal from the property and the loss of their entire equity following a

foreclosure auction. As an alternative, foreclosure rescuers have the ability to redeem the home from

foreclosure with a new mortgage of their own. For a moderate fee or portion of the existing equity, this

can keep the former homeowner in the home as a tenant while they repair their credit or increase their

income. After a given time period, the homeowner can then repurchase the property from the rescuer.

If done with full verbal and written disclosure, terms the consumer is capable of fulfilling, and

moderate total fees, foreclosure rescue can be suitable to consumers in dire situations.

This mechanism is often used by family members or friends in order to prevent the loss of a home. In

effect, the investor "lends" their good credit to the foreclosed homeowner by paying off the foreclosed

mortgage and obtaining the title to the home temporarily.

Risks to investors

2007-11-06T06:42:00.001-08:00

Liquidity risk

Credit/default: Default risk is generally accepted as a borrower’s inability to meet interest payment

obligations on time. For ABS, default may occur when maintenance obligations on the underlying

collateral are not sufficiently met as detailed in its prospectus. A key indicator of a particular

security’s default risk is its credit rating. Different tranches within the ABS are rated differently,

with senior classes of most issues receiving the highest rating, and subordinated classes receiving

correspondingly lower credit ratings.[7]

Event risk

Prepayment/reinvestment/early amortization: The majority of revolving ABS are subject to some degree of

early amortization risk. The risk stems from specific early amortization events or payout events that

cause the security to be paid off prematurely. Typically, payout events include insufficient payments

from the underlying borrowers, insufficient excess Fixed Income Sectors: Asset-Backed Securities spread,

a rise in the default rate on the underlying loans above a specified level, a decrease in credit

enhancements below a specific level, and bankruptcy on the part of the sponsor or servicer.[7]

Currency interest rate fluctuations: Like all fixed income securities, the prices of fixed rate ABS move

in response to changes in interest rates. Fluctuations in interest rates affect floating rate ABS prices

less than fixed rate securities, as the index against which the ABS rate adjusts will reflect interest

rate changes in the economy. Furthermore, interest rate changes may affect the prepayment rates on

underlying loans that back some types of ABS, which can affect yields. Home equity loans tend to be the

most sensitive to changes in interest rates, while auto loans, student loans, and credit cards are

generally less sensitive to interest rates.[7]

Contractual agreements

Moral hazard: Investors usually rely on the deal manager to price the securitizations’ underlying

assets. If the manager earns fees based on performance, there may be a temptation to mark up the prices

of the portfolio assets. Conflicts of interest can also arise with senior note holders when the manager

has a claim on the deal's excess spread.[9]

Servicer risk: The transfer or collection of payments may be delayed or reduced if the servicer becomes

insolvent. This risk is mitigated by having a backup servicer involved in the transaction.[7]

History

"Asset securitization began with the structured financing of mortgage pools in the 1970s. For decades

before that, banks were essentially portfolio lenders; they held loans until they matured or were paid

off. These loans were funded principally by deposits, and sometimes by debt, which was a direct

obligation of the bank (rather than a claim on specific assets). But after World War II, depository

institutions simply could not keep pace with the rising demand for housing credit. Banks, as well as

other financial intermediaries sensing a market opportunity, sought ways of increasing the sources of

mortgage funding. To attract investors, investment bankers eventually developed an investment vehicle

that isolated defined mortgage pools, segmented the credit risk, and structured the cash flows from the

underlying loans. Although it took several years to develop efficient mortgage securitization

structures, loan originators quickly realized the process was readily transferable to other types of

loans as well."[4]

In February 1970, the U.S. Department of Housing and Urban Development created the transaction using a

mortgage-backed security. The Government National Mortgage Association (GNMA or Ginnie Mae) sold

securities backed by a portfolio of mortgage loans. [10]

To facilitate the securitization of non-mortgage assets, businesses substituted private credit

enhancements. First, they over-collateralized pools of assets; shortly thereafter, they improved third-

party and structural enhancements. In 1985, securitization techniques that had been developed in the

mortgage market were applied for the first time to a class of non-mortgage assets — automobile loans. A

pool of assets second only to mortgages in volume, auto loans were a good match for structured finance;

their maturities, considerably shorter than those of mortgages, made the timing of cash flows more

predictable, and their long statistical histories of performance gave investors confidence.[4]

This early auto loan deal was a $60 million securitization originated by Marine Midland Bank and

securitized in 1985 by the Certificate for Automobile Receivables Trust (CARS, 1985-1).[11]

The first significant bank credit card sale came to market in 1986 with a private placement of $50

million of outstanding bank card loans. This transaction demonstrated to investors that, if the yields

were high enough, loan pools could support asset sales with higher expected losses and administrative

costs than was true within the mortgage market. Sales of this type — with no contractual obligation by

the seller to provide recourse — allowed banks to receive sales treatment for accounting and regulatory

purposes (easing balance sheet and capital constraints), while at the same time allowing them to retain

origination and servicing fees. After the success of this initial transaction, investors grew to accept

credit card receivables as collateral, and banks developed structures to normalize the cash flows.[4]

Starting in the 1990's with some earlier private transactions, securitization technology was applied to

a number of sectors of the reinsurance and insurance markets including life and catastrophe. This

activity grew to nearly $15bn of issuance in 2006 following the disruptions in the underlying markets

caused by Hurricane Katrina and Regulation XXX. Key areas of activity in the broad area of Alternative

Risk Transfer include Catastrophe bonds, Life Insurance Securitization and Reinsurance Sidecars.

As estimated by the Bond Market Association, in the United States, total amount outstanding at the end

of 2004 at $1.8 trillion. This amount is about 8 percent of total outstanding bond market debt ($23.6

trillion), about 33 percent of mortgage-related debt ($5.5 trillion), and about 39 percent of corporate

debt ($4.7 trillion) in the United States. In nominal terms, over the last ten years, (1995-2004,) ABS

amount outstanding has grown about 19 percent annually, with mortgage-related debt and corporate debt

each growing at about 9 percent. Gross public issuance of asset-backed securities remains strong,

setting new records in many years. In 2004, issuance was at an all-time record of about $0.9 trillion.

[12]

At the end of 2004, the larger sectors of this market are credit card-backed securities (21 percent),

home-equity backed securities (25 percent), automobile-backed securities (13 percent), and

collateralized debt obligations (15 percent). Among the other market segments are student loan-backed

securities (6 percent), equipment leases (4 percent), manufactured housing (2 percent), small business

loans (such as loans to convenience stores and gas stations), and aircraft leases. [12]

Special types of securitization

2007-11-06T06:41:00.002-08:00

Master trust

A master trust is a type of SPV particularly suited to handle revolving credit card balances, and has

the flexibility to handle different securities at different times. In a typical master trust

transaction, an originator of credit card receivables transfers a pool of those receivables to the trust

and then the trust issues securities backed by these receivables. Often there will be many tranched

securities issued by the trust all based on one set of receivables. After this transaction, typically

the originator would continue to service the receivables, in this case the credit cards.

There are various risks involved with master trusts specifically. One risk is that timing of cash flows

promised to investors might be different from timing of payments on the receivables. For example, credit

card-backed securities can have maturities of up to 10 years, but credit card-backed receivables usually

pay off much more quickly. To solve this issue these securities typically have a revolving period, an

accumulation period, and an amortization period. All three of these periods are based on historical

experience of the receivables. During the revolving period, principal payments received on the credit

card balances are used to purchase additional receivables. During the accumulation period, these

payments are accumulated in a separate account. During the amortization period, new payments are passed

through to the investors.

A second risk is that the total investor interests and the seller's interest are limited to receivables

generated by the credit cards, but the seller (originator) owns the accounts. This can cause issues with

how the seller controls the terms and conditions of the accounts. Typically to solve this, there is

language written into the securitization to protect the investors.

A third risk is that payments on the receivables can shrink the pool balance and under-collateralize

total investor interest. To prevent this, often there is a required minimum seller's interest, and if

there was a decrease then an early amortization event would occur.[6]

Issuance trust

In 2000, Citibank introduced a new structure for credit card-backed securities, called an issuance

trust, which does not have limitations, that master trusts sometimes do, that requires each issued

series of securities to have both a senior and subordinate tranche. There are other benefits to a

issuance trust: they provide more flexibility in issuing senior/subordinate securities, can increase

demand because pension funds are eligible to invest in investment-grade securities issued by them, and

they can significantly reduce the cost of issuing securities. Because of these issues, issuance trusts

are now the dominant structure used by major issuers of credit card-backed securities.[6]

Grantor trust

Grantor trusts are typically used in automobile-backed securities and REMICs (Real Estate Mortgage

Investment Conduits). Grantor trusts are very similar to pass-through trusts used in the earlier days of

securitization. An originator pools together loans and sells them to a grantor trust, which issues

classes of securities backed by these loans. Principal and interest received on the loans, after

expenses are taken into account, are passed through to the holders of the securities on a pro-rata

basis.

Owner trust

In an owner trust, there is more flexibility in allocating principal and interest received to different

classes of issued securities. In an owner trust, both interest and principal due to subordinate

securities can be used to pay senior securities. Due to this, owner trusts can tailor maturity, risk and

return profiles of issued securities to investor needs. Usually, any income remaining after expenses is

kept in a reserve account up to a specified level and then after that, all income is returned to the

seller. Owner trusts allow credit risk to be mitigated by over-collateralization by using excess

reserves and excess finance income to prepay securities before principal, which leaves more collateral

for the other classes.

Motives for securitization

Advantages to issuer

Reduces funding costs: Through securitization, a company rated BB but with AAA worthy cash flow would be

able to borrow at possibly AAA rates. This is the number one reason to securitize a cash flow and can

have tremendous impacts on borrowing costs. The difference between BB debt and AAA debt can be multiple

hundreds of basis points. For example, Moody's downgraded Ford Motor Credit's rating in January 2002,

but a senior automobile backed securities issued by Ford Motor Credit in January 2002 and April 2002

continue to be rated AAA, because of the strength of the underlying collateral, and other credit

enhancements.[6]

Reduces asset-liability mismatch: "Depending on the structure chosen, securitization can offer perfect

matched funding by eliminating funding exposure in terms of both duration and pricing basis."[2]

Essentially, in most banks and finance companies, the liability book or the funding is from borrowings.

This often comes at a high cost. Securitization allows such banks and finance companies to create a

self-funded asset book.

Lower capital requirements: Some firms, due to legal, regulatory, or other reasons, have a limit or

range that their leverage is allowed to be. By securitizing some of their assets, which qualifies as a

sale for accounting purposes, these firms will be able to lessen the equity on their balance sheets

while maintaining the "earning power" of the asset.

Locking in profits: For a given block of business, the total profits have not yet emerged and thus

remain uncertain. Once the block has been securitized, the level of profits has now been locked in for

that company, thus the risk of profit not emerging, or the benefit of super-profits, has now been passed

on.

Transfer risks (credit, liquidity, prepayment, reinvestment, asset concentration): Securitization makes

it possible to transfer risks from an entity that does not want to bear it, to one that does. Two good

example of this are Catastrophe Bonds and Entertainment Securitizations. Similarly, by securitizing a

block of business (thereby locking in a degree of profits), the company has effectively freed up its

balance to go out and write more profitable business.

Off balance sheet: Derivatives of many types have in the past been referred to as "off balance sheet."

This term implies that the use of derivatives has no balance sheet impact. While there are differences

among the various accounting standards internationally, there is a general trend towards the requirement

to record derivatives at fair value on the balance sheet. There is also a generally accepted principle

that, where derivatives are being used as a hedge against underlying assets or liabilities, accounting

adjustments are required to ensure that the gain/loss on the hedged instrument is recognized in the

income statement on a similar basis as the underlying assets and liabilities. Certain credit derivatives

products, particularly Credit Default Swaps, now have more or less universally accepted market standard

documentation. In the case of Credit Default Swaps, this documentation has been formulated by the

International Swaps and Derivatives Association (ISDA) who have for a long time provided documentation

on how to treat such derivatives on balance sheets.

Earnings: Securitization makes it possible to record an earnings bounce without any real addition to the

firm. When a securitization takes place, there often is a "true sale" that takes place between the

Originator (the parent company) and the SPE. This sale has to be for the market value of the underlying

assets for the "true sale" to stick and thus this sale is reflected on the parent company's balance

sheet, which will boost earnings for that quarter by the amount of the sale. While not illegal in any

respect, this does distort the true earnings of the parent company.

Admissibility: Future cashflows may not get full credit in a company's accounts (life insurance

companies, for example, may not always get full credit for future surpluses in their regulatory balance

sheet), and a securitization effectively turns an admissible future surplus flow into an admissible

immediate cash asset.

Liquidity: Future cashflows may simply be balance sheet items which currently are not available for

spending, whereas once the book has been securitized, the cash would be available for immediate spending

or investment. This also creates a reinvestment book which may well be at better rates.

Disadvantages to issuer

May reduce portfolio quality: If the AAA risks, for example, are being securitized out, this would leave

a materially worse quality of residual risk.

Costs: Securitizations are expensive due to management and system costs, legal fees, underwriting fees,

rating fees and ongoing administration. An allowance for unforeseen costs is usually essential in

securitizations, especially if it is an atypical securitization.

Size limitations: Securitizations often require large scale structuring, and thus may not be cost-

efficient for small and medium transactions.

Risks: Since securitization is a structured transaction, it may include par structures as well as credit

enhancements that are subject to risks of impairment, such as prepayment, as well as credit loss,

especially for structures where there are some retained strips.

Advantages to investors

Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)

Opportunity to invest in a specific pool of high quality credit-enhanced assets: Due to the stringent

requirements for corporations (for example) to attain high ratings, there is a dearth of highly rated

entities that exist. Securitizations, however, allow for the creation of large quantities of AAA, AA or

A rated bonds, and risk averse institutional investors, or investors that are required to invest in only

highly rated assets, have access to a larger pool of .

Portfolio diversification: Depending on the securitization, hedge funds as well as other institutional

investors tend to like investing in bonds created through Securitizations because they may be

uncorrelated to their other bonds and securities.

Isolation of credit risk from the parent entity: Since the assets that are securitized are isolated (at

least in theory) from the assets of the originating entity, under securitization it may be possible for

the securitization to receive a higher credit rating than the "parent," because the underlying risks are

different. For example, a small bank may be considered more risky than the mortgage loans it makes to

its customers; were the mortgage loans to remain with the bank, the borrowers may effectively be paying

higher interest (or, just as likely, the bank would be paying higher interest to its creditors, and

hence less profitable).

Issuance

2007-11-06T06:41:00.001-08:00

To be able to buy the assets from the originator, the issuer SPV issues tradable securities to fund the

purchase. Investors purchase the securities, either through a private offering (targeting institutional

investors) or on the open market. The performance of the securities is then directly linked to the

performance of the assets. Credit rating agencies rate the securities which are issued in order to

provide an external perspective on the liabilities being created and help the investor make a more

informed decision.

In transactions with static assets, a depositor will assemble the underlying collateral, help structure

the securities and work with the financial markets in order to sell the securities to investors. The

depositor has taken on added significance under Regulation AB. The depositor typically owns 100% of the

beneficial interest in the issuing entity and is usually the parent or a wholly owned subsidiary of the

parent which initiates the transaction. In transactions with managed (traded) assets, asset managers

assemble the underlying collateral, help structure the securities and work with the financial markets in

order to sell the securities to investors.

Some deals may include a third-party guarantor which provides guarantees or partial guarantees for the

assets, the principal and the interest payments, for a fee.

The securities can be issued with either a fixed interest rate or a floating rate. Fixed rate ABS set

the “coupon” (rate) at the time of issuance, in a fashion similar to corporate bonds. Floating rate

securities may be backed by both amortizing and nonamortizing assets. In contrast to fixed rate

securities, the rates on “floaters” will periodically adjust up or down according to a designated index

such as a U.S. Treasury rate, or, more typically, the London Interbank Offered Rate (LIBOR). The

floating rate usually reflects the movement in the index plus an additional fixed margin to cover the

added risk[7]

Credit enhancement and tranching

Unlike conventional corporate bonds which are unsecured, securities generated in a securitization deal

are "credit enhanced," meaning their credit quality is increased above that of the originator's

unsecured debt or underlying asset pool. This increases the likelihood that the investors will receive

cash flows to which they are entitled, and thus causes the securities to have a higher credit rating

than the originator. Some securitizations use external credit enhancement provided by third parties,

such as surety bonds and parental guarantees (although this may introduce a conflict of interest).

Individual securities are often split into tranches, or categorized into varying degrees of

subordination. Each tranche has a different level of credit protection or risk exposure than another:

there is generally a senior (“A”) class of securities and one or more junior subordinated (“B,” “C,”

etc.) classes that function as protective layers for the “A” class. The senior classes have first claim

on the cash that the SPV receives, and the more junior classes only start receiving repayment after the

more senior classes have repaid. Because of the cascading effect between classes, this arrangement is

often referred to as a cash flow waterfall. In the event that the underlying asset pool becomes

insufficient to make payments on the securities (e.g. when loans default within a portfolio of loan

claims), the loss is absorbed first by the subordinated tranches, and the upper-level tranches remain

unaffected until the losses exceed the entire amount of the subordinated tranches. The senior securities

are typically AAA rated, signifying a lower risk, while the lower-credit quality subordinated classes

receive a lower credit rating, signifying a higher risk. [7]

The most junior class (often called the equity class) is the most exposed to payment risk. In some

cases, this is a special type of instrument which is retained by the originator as a potential profit

flow. In some cases the equity class receives no coupon (either fixed or floating), but only the

residual cash flow (if any) after all the other classes have been paid.

There may also be a special class which absorbs early repayments in the underlying assets. This is often

the case where the underlying assets are mortgages which, in essence, are repaid every time the property

is sold. Since any early repayment is passed on to this class, it means the other investors have a more

predictable cash flow.

If the underlying assets are mortgages or loans, there are usually two separate "waterfalls" because the

principal and interest receipts can be easily allocated and matched. But if the assets are income-based

transactions such as rental deals it is not possible to differentiate so easily between how much of the

revenue is income and how much principal repayment. In this case all the income is used to pay the cash

flows due on the bonds as those cash flows become due.

Credit enhancements affect credit risk by providing more or less protection to promised cash flows for a

security. Additional protection can help a security achieve a higher rating, lower protection can help

create new securities with differently desired risks, and these differential protections can help place

a security on more attractive terms.

In addition to subordination, credit may be enhanced through:[6]

* A reserve or spread account, in which funds remaining after expenses such as principal and

interest payments, charge-offs and other fees have been paid-off are accumulated, and can be used when

SPE expenses are greater than its income.
* Third-party insurance, or guarantees of principal and interest payments on the securities.
* Over-collateralization, usually by using finance income to pay off principal on some securities

before principal on the corresponding share of collateral is collected.
* Cash funding or a cash collateral account, generally consisting of short-term, highly rated

investments purchased either from the seller's own funds, or from funds borrowed from third parties that

can be used to make up shortfalls in promised cash flows.
* A third-party letter of credit or corporate guarantee.
* A back-up servicer for the loans.
* Discounted receivables for the pool.

Servicing

A servicer collects payments and monitors the assets that are the crux of the structured financial deal.

The servicer can often be the originator, because the servicer needs very similar expertise as the

originator.

The servicer can significantly affect the cash flows to the investors because it controls the collection

policy, which influences the proceeds collected, the charge-offs and the recoveries on the loans. Any

income remaining after payments and expenses is usually accumulated to some extent in a reserve or

spread account, and any further excess is returned to the seller. Bond rating agencies publish ratings

of asset-backed securities based on the performance of the collateral pool, the credit enhancements and

the probability of default.[6]

When the issuer is structured as a trust, the trustee is a vital part of the deal as the gate-keeper of

the assets that are being held in the issuer. Even though the trustee is part of the SPV, which is

typically wholly owned by the Originator, the trustee has a fiduciary duty to protect the assets and

those who own the assets, typically the investors.

Repayment structures

Unlike corporate bonds, most securitizations are amortized, meaning that the principal amount borrowed

is paid back gradually over the specified term of the loan, rather than in one lump sum at the maturity

of the loan. Fully amortizing securitizations are generally collateralized by fully amortizing assets

such as home equity loans, auto loans, and student loans. Prepayment uncertainty is an important concern

with fully amortizing ABS. The possible rate of prepayment varies widely with the type of underlying

asset pool, so many prepayment models have been developed in an attempt to define common prepayment

activity. The PSA prepayment model is a well-known example. [8][7]

A controlled amortization structure is a method of providing investors with a more predictable repayment

schedule, even though the underlying assets may be nonamortizing. After a predetermined “revolving”

period, during which only interest payments are made, these securitizations attempt to return principal

to investors in a series of defi ned periodic payments, usually within a year. An early amortization

event is the risk of the debt being retired early.[7]

On the other hand, bullet or slug structures return the principal to investors in a single payment. The

most common bullet structure is called the soft bullet, meaning that the final bullet payment is not

guaranteed on the expected maturity date; however, the majority of these securitizations are paid on

time. The second type of bullet structure is the hard bullet, which guarantees that the principal will

be paid on the expected maturity date. Hard bullet structures are less common for two reasons: investors

are comfortable with soft bullet structures, and they are reluctant to accept the lower yields of hard

bullet securities in exchange for a guarantee.[7]

Securitizations are often structured as a sequential pay bond, paid off in a sequential manner based on

maturity. This means that the first tranche, which may have a one-year average life, will receive all

principal payments until it is retired; then the second tranche begins to receive principal, and so

forth.[7] Pro rata bond structures pay each tranche a proportionate share of principal throughout the

life of the security.[7]

Securitization

2007-11-06T06:40:00.002-08:00

Securitization is a structured finance process in which assets, receivables or financial instruments are

acquired, classified into pools, and offered as collateral for third-party investment.[1] It involves

the selling of financial instruments which are backed by the cash flow or value of the underlying

assets.[2]

Securitization typically applies to assets that are illiquid (i.e. cannot easily be sold). It is common

in the real estate industry, where it is applied to pools of leased property, and in the lending

industry, where it is applied to lenders' claims on mortgages, home equity loans, student loans and

other debts.

Any assets can be securitized so long as they are associated with a steady amount of cash flow.

Investors "buy" these assets by making loans which are secured against the underlying pool of assets and

its associated income stream. Securitization thus "converts illiquid assets into liquid assets"[3] by

pooling, underwriting and selling their ownership in the form of asset-backed securities (ABS).[4]

Securitization utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose entity

[SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and thereby obtain

lower interest rates from potential lenders. A credit derivative is also generally used to change the

credit quality of the underlying portfolio so that it will be acceptable to the final investors.

Securitization has evolved from tentative beginnings in the late 1970s to a vital funding source with an

estimated total aggregate outstanding of $8.06 trillion (as of the end of 2005, by the Bond Market

Association) and new issuance of $3.07 trillion in 2005 in the U.S. markets alone.[citation needed]

Structure
The diagram describes a typical transaction with this separate company (usually referred to as a Special

Purpose Vehicle SPV or in the USA as a Special Purpose Entity SPE
The diagram describes a typical transaction with this separate company (usually referred to as a Special

Purpose Vehicle SPV or in the USA as a Special Purpose Entity SPE

Pooling and transfer

The originator initially owns the assets engaged in the deal. This is typically a company looking to

either raise capital, restructure debt or otherwise adjust its finances. Under traditional corporate

finance concepts, such a company would have three options to raise new capital: a loan, bond issuance,

or issuance of stock. However, stock offerings dilute the ownership and control of the company, while

loan or bond financing is often prohibitively expensive due to the credit rating of the company and the

associated rise in interest rates.

The consistently revenue-generating part of the company may have a much higher credit rating than the

company as a whole. For instance, a leasing company may have provided $10m nominal value of leases, and

it will receive a cash flow over the next five years from these. It cannot demand early repayment on the

leases and so cannot get its money back early if required. If it could sell the rights to the cash flows

from the leases to someone else, it could transform that income stream into a lump sum today (in effect,

receiving today the present value of a future cash flow). Where the originator is a bank or other

organization that must meet capital adequacy requirements, the structure is usually more complex because

a separate company is set up to buy the debts.

A suitably large portfolio of assets is "pooled" and sold to a special purpose vehicle (the issuer), a

tax-exempt company or trust formed for the specific purpose of funding the assets. Once the assets are

transferred to the issuer, there is normally no recourse to the originator. The issuer is "bankruptcy

remote," meaning that if the originator goes into bankruptcy, the assets of the issuer will not be

distributed to the creditors of the originator. In order to achieve this, the governing documents of the

issuer restrict its activities to only those necessary to complete the issuance of securities.

Accounting standards govern when such a transfer is a sale, a financing, a partial sale, or a part-sale

and part-financing.[5] In a sale, the originator is allowed to remove the transferred assets from its

balance sheet: in a financing, the assets are considered to remain the property of the originator.[6]

Under US accounting standards, the originator achieves a sale by being at arm's length from the issuer,

in which case the issuer is classified as a "qualifying special purpose entity" or "qSPE".

Because of these structural issues, the originator typically needs the help of an investment bank (the

arranger) in setting up the structure of the transaction.

A Home Equity Line of Credit

2007-11-06T06:40:00.001-08:00

A Home Equity Line of Credit (often called HELOC, pronounced HEE-lock) is a loan in which the lender

agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the

borrower's equity in his/her house.

A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum

up front, but uses the line of credit to borrow sums that total no more than the amount, similar to a

credit card. At closing you are assigned a specified credit limit that you can borrow up to. During a

"draw period" (typically 5 to 25 years), HELOC funds can be borrowed and you pay back only what you use

plus interest. Depending on how much you use the HELOC, you will have a minimum monthly payment

requirement (often "interest only"); beyond the minimum, it is up to you how much to pay and when to

pay. At the end of the draw period, you will have to pay back the full principal amount borrowed either

in a lump-sum balloon payment or according to a loan amortization schedule.

Another important difference from a conventional loan: the interest rate on a HELOC is variable based on

an index such as prime rate. This means that the interest rate can - and almost certainly will - change

over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the

same way. The margin is the difference between the prime rate and the interest rate the borrower will

actually pay. Lenders do not generally offer this information and it is up to the consumer to ask for it

before taking a loan.

HELOC loans have become very popular in the United States in the 2000s, in part because interest paid is

typically (depending on specific circumstances) deductible under federal and many state income tax laws.

This effectively reduces the cost of borrowing funds. Another reason for the popularity of HELOCs is the

flexibility not found in most other loans - both in terms of borrowing and repaying on a schedule

determined by the borrower. Furthermore, HELOC loans' popularity growth may also stem from their having

a better image than a "second mortgage," a term which can more directly imply an undesirable level of

debt.

It must always be kept in mind that the underlying collateral of a home equity line of credit (HELOC) is

the home. This means that failure to repay the loan or meet loan requirements may result in foreclosure.

A home equity loan1

2007-11-06T06:36:00.000-08:00

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity

in their home as collateral. These loans are sometimes useful to help finance major home repairs,

medical bills or college education. A home equity loan creates a lien against the borrower's house, and

reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held

in first or, less commonly, third position. Most home equity loans require good to excellent credit

history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two

types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the

property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not

always, for a shorter term than first mortgages. In the United States, it is sometimes possible to

deduct home equity loan interest on one's personal income taxes.

Closed end home equity loan
The borrower receives a lump sum at the time of the closing and cannot borrow further. The maximum

amount of money that can be borrowed is determined by variables including credit history, income, and

the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the

appraised value of the home, less any liens, although there are lenders that will go above 100% when

doing over-equity loans. However, state law governs in this area; for example, Texas (which was, for

many years, the only state to not allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to

15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon

payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or

refinancing the loan.

Open end home equity loan
This is a revolving credit loan, also referred to as a home equity line of credit (HELOC), where the

borrower can choose when and how often to borrow against the equity in the property, with the lender

setting an initial limit to the credit line based on criteria similar to those used for closed-end

loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less

any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The

minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Home Equity Loan Fees
Here is a brief list of possible fees that may apply to your home equity loan: Appraisal fees,

originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs

are often included in loans. Surveyor and conveyor or valuation fees may also apply to loans, some may

be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own

licensed surveyor to inspect the property considered for purchase. The title charges in secondary

mortgages or equity loans are often fees for renewing the title information. Most loans will have fees

of some sort, so make sure you read and ask several questions about the fees that are charged.