Lecture: Securitization: Data, Part I

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The Global Financial Crisis

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Yale University

The Global Financial Crisis

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Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.

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Safe Assets and the Global Savings Glut

Lecture: Securitization: Data, Part I3:14

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Andrew Metrick
Michael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy Geithner
Lecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management

All right so now we have a basic structure for securitization.

Now let's see what actually happened,

specifically what happened in the years leading up to the global financial crisis.

In the United States, mortgage backed securities, so these are securitization

but these are bonds issued by trusts, built through these securitizations,

with mortgages as the assets that are underlying everything.

They were dominated by the agencies, the government sponsored

enterprises of Fannie Mae and Freddie Mac until about 2003.

You can see this in the picture that's up on the screen now.

The solid line shows the total amount of mortgage related securities issuance.

This is mortgage backed securities.

Here's the total amount is the solid line.

The dotted line is the total amount that has been issued,

guaranteed by, the agencies, Fannie Mae and Freddie Mac.

Looking at these two lines you can see that up until

2003 they are very close together.

The most important thing about this picture is to notice the gap

between the dotted line and solid line that emerges after 2003.

That gap is what you will hear called private label mortgage backed securities.

So, not coming out through Fannie Mae and Freddie Mac, but

rather through some other entity and not having any kind of government guarantee.

The two major types are shown at the bottom.

The line that goes higher is RMBS,

which stands for residential mortgage backed securities.

And the dotted line is CMBS or commercial mortgage backed securities.

Residential mortgage backed securities are,

as you might expect, backed by residential mortgages.

These are going to be mortgages that do not qualify for

the government sponsored enterprise guarantees.

So as anyone who was trying to get a mortgage during this time may know,

the way that it worked is the government will guarantee mortgages,

but only mortgages up to a certain level.

A level that has varied somewhat over time.

And only mortgages where the underlying mortgage borrower meets certain criteria.

So those are the GSE or agency mortgages.

Ones that don't fit that, either because the mortgage is too large or

because the borrower doesn't qualify, are what we see down at the bottom.

The dotted line down at the bottom of residential mortgage backed securities.

CMBS, or commercial mortgage backed securities, have backed in them,

a whole set of commercial loans, these are loans made to businesses.

And again, there is no government program that would enable us to guarantee these in

the form that we have here.

These are going to be banks taking things off of their balance sheet, putting them

into a trust, and then selling securities, and the cash flows come from that trust.

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