Washington Mutual's Covered Bonds Essay

When the debt instrument and the option to acquire common stock are inseparable, as in the case of convertible bonds, the entire proceeds of the bond issue are allocated to the debt and the related premium or discount accounts.

In the movie the big short, Lewis Ranieri, who is a banker of the Wall Street, created an idea that companies packed thousands of mortgage all bundled together to sell, which is the AAA credit-rating bond, and can obtain high yields with low risk because everyone should pay for their mortgage. The concept of Lewis Ranieri is called mortgage-backed securities (MBS). However, the demand of buying MBS is more than MBS supply. Therefore, when the risk of MBS is high, Collateralized Debt Obligation (CDO) is a way to change subprime loans to high- rating bonds and it can be sold again. Although CDO is full of subprime loans, it still can get AAA rating because

Accordingly, the firm had more mortgage-backed safes than any other company in the U.S; in fact, the mortgage-backed securities were four times as many as its value of shared equity to its shareholders. In the early parts 2007, the company had a total of $86 billion worth of mortgage-backed securities; the credit crisis of the U.S saw the stock value fall drastically (Pontell, 2014). The business was affected by the miscalculation; in the year to follow the company would eliminate mortgage-related employee positions and close its offices in the BNC unit and the Alt-A lender Aurora in some states.

The private label mortgage securitization collected a series of assets – most of them are high-yield junk bonds, mortgage securities, credit-default swap with varying degrees of risk. The securitization of subprime mortgages was attractive to investors due to high interest rates and high return features. More and more financial institutions started to sell private label mortgage securitization, including banks, insurance companies and so on. In 2006, the CDO market ranged from $0.5 trillion to $2 trillion (boundless. Com). Also, by 2007, about 70% of subprime borrowers used hybrid adjustable-rate mortgages (ARMs).

4. the remainder of the interest rate differential is retained by the financial institution as security against credit losses and is paid to Manufactured Homes in proportion to customer payments received by the financial institution

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

Thus, the security is compound financial instrument. If the convertible debt is convertible at the investor’s option, the initial proceeds are divided between the debt element (both principal and interest) and the equity element, the conversion option.

The secondary mortgage market was on the up-rise when Michael Lewis accepted a job at Salomon Brother’s. The secondary mortgage market was the selling of bonds, with a promise to be paid back with mortgage loans. The lender, whomever that

As indicated above, the sponsor (MLCS in Merrill’s case) creates a TOB through the combination of a long-term municipal bond and an interest rate swap. The swap functions as a hedge to protect the sponsor against the possibility of short term tax-exempt rates increasing relative to the fixed coupons on the underlying municipal bonds.

These brokers have neither the credit skills nor the interest to conduct proper payment due of potential homebuyers. Their interest is only in selling the houses as fast as they can. The MBS instruments allowed all financial institutions to transfer the risks to other investors. The dissociation of ownership of assets from risks encouraged poor credit assessment and was fundamental increasing the risks.

This case raises many interesting questions concerning the record setting issuance of corporate debt by WorldCom, Inc. (“WorldCom”). Both the surprisingly voluminous structure of the proposed issuance and the foreboding macro-economic climate in which it was slated spark concerns over the risk and cost of the move. One of the first questions that must be addressed is whether WorldCom’s timing was appropriate. Next, the company’s choice of structure for the bond issuance must be analyzed. Finally, the cost of issuing each tranche of debt must be estimated in order to determine how much WorldCom is actually giving up to achieve the $6 billion in funds.

If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.

In the new system, an investment banker buys the mortgage from the lender, borrowing millions of dollars to buy thousands of mortgages, and every month he gets payments from homeowners for each of the mortgages. The banker then consolidates all the mortgages and splits the final product into three sections: safe, okay, and risky mortgages, which make up a collateralized debt obligation (CDO). As homeowners pay their mortgages, money flows into each of the sections, with the safe filling first and the risky filling last, contributing to their respective names. Credit agencies stamp the top two safer mortgages with a triple A or triple B rating, which are then be sold to investors who want a safe mortgage, while the risky slice is sold to hedge funds who want a risky investment. The bankers make millions, pay back their loans, and investors also make a worthwhile investment. So pleased are the investors, however, that they want more. Unfortunately, back at the beginning of the cycle, the mortgage broker can no longer find qualified mortgagers

Lord Diplock once observed that Britain has become a ‘property owning, particularly a real mortgage to a building society owning, democracy’. A mortgage in relation to Lindley MR in Santley v Wilde , “is a transaction under which land or chattels are given as security for the payment of a debt or the discharge of some other obligations”. Lord Justice Munby stated that it means a charge on property to secure the repayment by a debtor to his creditor of monies lent. It is also a loan for a property that ought to be paid inside of a predefined timeframe i.e., it involves a transfer of a legal interest for the borrowers land (mortgagor) to the lender (mortgagee) with the procurement that the lenders interest terminates then loan and interest are reimbursed. The mortgage transaction was described by Maitland as “one long suppressio veri and suggestion falsi”.

A call provision in a bond issue, the issuer of the bond principal plus any call premium costs and allows for early repayment. Interest rates have declined greatly in the economy, most of the time because it is a bond issuer, it is. The issuer issues new securities to current securities and lower interest calls. For this you have to pay each year for the issuer to reduce interest payments