SECURITIZATION AND BLOCKCHAIN (Research Paper Sample)

Chapter 2: Literature Review This chapter outlines the main shortcomings of the current mortgage securitization process, the features of blockchain technology, and its potential impact. Since this is a developing research topic, there is limited empirical data, and this literature review takes an exploratory approach. It specifically analyzes the frictions inherent in the current securitization process and the potential of blockchain to enhance this process. This section critically examines information from publications by institutions, peer-reviewed articles, and white papers. 2.1 Mortgage Securitization Securitization involves the pooling and transforming illiquid assets into marketable securities backed by the expected cash flows from the assets and not the private corporation ADDIN CSL_CITATION {"citationItems":[{"id":"ITEM-1","itemData":{"author":[{"dropping-particle":"","family":"Paper","given":"Working","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Zealand","given":"New","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Working","given":"Treasury","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Treasury","given":"The","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Government","given":"New Zealand","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Zealand","given":"New","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Paper","given":"Treasury Working","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Government","given":"New Zealand","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Treasury","given":"The","non-dropping-particle":"","parse-names":false,"suffix":""}],"id":"ITEM-1","issued":{"date-parts":[["2000"]]},"page":"0-25","title":"www.econstor.eu","type":"article-journal"},"uris":["http://www.mendeley.com/documents/?uuid=1f76673c-ab83-45be-9072-6da73f489508"]}],"mendeley":{"formattedCitation":"(Paper <i>et al.</i>, 2000)","manualFormatting":"(Davis","plainTextFormattedCitation":"(Paper et al., 2000)","previouslyFormattedCitation":"(Paper <i>et al.</i>, 2000)"},"properties":{"noteIndex":0},"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"}(Davis, 2000). Davis (2000) further identified that such assets have a predictable stream of future cash-flows and occur in a large pool. As a result, this makes mortgages the most commonly securitized asset (hence the name mortgage-backed security), and it has grown significantly since their early beginnings in the 1970s. The borrower's principal and interest payments and residential home secure the MBS. Fabozzi (2016) identifies that the mortgage-backed securities market had its origins in the late 1970s. The formation of Ginnie Mae, Freddie Mac, Fannie Mae, and enactment of Rule 425 by the Securities and Exchange Commission contributed to the growth of this market. Financial institutions soon learned how to restructure the mortgage cash flows and create a new and diverse class of assets for sale to investors. The increased participation of financial institutions in using complex securitization tools is considered one of the contributors to the sub-prime mortgage crisis of 2007 ADDIN CSL_CITATION {"citationItems":[{"id":"ITEM-1","itemData":{"DOI":"10.1108/s0733-558x(2010)000030a006","ISSN":"0733558X","abstract":"The current crisis in the mortgage securitization industry highlights significant failures in our models of how markets work and our political will, organizational capability, and ideological desire to intervene in markets. This article shows that one of the main sources of failure has been the lack of a coherent understanding of how these markets came into existence, how tactics and strategies of the principal firms in these markets have evolved over time, and how we ended up with the economic collapse of the main firms. It seeks to provide some insight into these processes by compiling both historical and quantitative data on the emergence and spread of these tactics across the largest investment banks and their principal competitors from the mortgage origination industry. It ends by offering some policy proscriptions based on the analysis.","author":[{"dropping-particle":"","family":"Fligstein","given":"Neil","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Goldstein","given":"Adam","non-dropping-particle":"","parse-names":false,"suffix":""}],"container-title":"Research in the Sociology of Organizations","id":"ITEM-1","issue":"PART A","issued":{"date-parts":[["2010"]]},"page":"29-70","title":"The anatomy of the mortgage securitization crisis","type":"article-journal","volume":"30"},"uris":["http://www.mendeley.com/documents/?uuid=485f4988-4301-4c6f-a66d-8d8532905d56"]}],"mendeley":{"formattedCitation":"(Fligstein and Goldstein, 2010)","plainTextFormattedCitation":"(Fligstein and Goldstein, 2010)","previouslyFormattedCitation":"(Fligstein and Goldstein, 2010)"},"properties":{"noteIndex":0},"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"}(Fligstein and Goldstein, 2010). Several parties are involved in a securitization transaction: “the original lender, the loan originator, the special purpose vehicle (SPV), the underwriter, the credit rating agency, the servicer, and the trustee” ADDIN CSL_CITATION {"citationItems":[{"id":"ITEM-1","itemData":{"DOI":"10.2861/788633","ISBN":"9789282380246","author":[{"dropping-particle":"","family":"Delivorias","given":"Angelos","non-dropping-particle":"","parse-names":false,"suffix":""}],"container-title":"European Parliamentary Research Service","id":"ITEM-1","issue":"October","issued":{"date-parts":[["2016"]]},"title":"Understanding Securitisation: Background, benefits, risks","type":"article-journal"},"uris":["http://www.mendeley.com/documents/?uuid=d72c254e-fcb8-4ea1-88ca-cadc96332ae6"]}],"mendeley":{"formattedCitation":"(Delivorias, 2016)","manualFormatting":"(Delivorias, 2016, p.3)","plainTextFormattedCitation":"(Delivorias, 2016)","previouslyFormattedCitation":"(Delivorias, 2016)"},"properties":{"noteIndex":0},"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"}(Delivorias, 2016, p.3). The original lender is a non-financial firm that wishes to securitize its trade receivables. The sponsor is the financial institution that buys exposure from the original lender to create a securitization transaction. The originator pools together income-producing assets and sells them to an SPV. The SPV or issuer creates and sells securities to investors. The underwriter offers guidance on the structure and pricing of the transaction. The rating agencies rate the securities held by the SPV, the servicer performs administrative duties for the SPV, for instance, sending billing statements and collecting payments. The trustee ensures that the servicer transfers money to the SPV and the investors such as asset managers receive payment based on the contract terms. Gorton & Metrick (2012) provide a simplified model of the securitization process. The process starts with a financial institution (the originator) pooling together mortgages that have similar characteristics. These pools represent assets of the originator, and the goal is to sell them to investors to obtain capital. With the help of an attorney agency, the originator sells the assets to an arranger or creates an SPV that purchases the originator's assets and absorbs the credit risk. The SPV will subdivide these securities into tranches, which undergo rating by a rating agency, and are sold to the market. Gotron & Metrick (2012) emphasize that the cashflows from the SPV represent the backing for the securities sold. The housing-market bubble and the complex securitization of residential MBS are considered the major contributors to the global financial crisis. ADDIN CSL_CITATION {"citationItems":[{"id":"ITEM-1","itemData":{"DOI":"10.1561/0500000024","ISSN":"15672395","abstract":"In this survey we provide an overview of the subprime mortgage securitization process and the seven key informational frictions which arise. We discuss how market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how the rating agencies assign credit ratings to mortgage-backed securities, and outline how the agencies monitor the performance of mortgage pools over time. Throughout the survey, we draw upon the example of a mortgage pool securitized by New Century during 2006. © 2008 A. B. Ashcraft and T. Schuermann.","author":[{"dropping-particle":"","family":"Ashcraft","given":"Adam B.","non-dropping-particle":"","parse-names":false,"suffix":""},{"dropping-particle":"","family":"Schuermann","given":"Til","non-dropping-particle":"","parse-names":false,"suffix":""}],"container-title":"Foundations and Trends in Finance","id":"ITEM-1","issue":"3","issued":{"date-parts":[["2006"]]},"page":"191-309","title":"Understanding the securitization of subprime mortgage credit","type":"article-journal","volume":"2"},"uris":["http://www.mendeley.com/documents/?uuid=a5783597-a17f-4822-91d9-280514d2cd62"]}],"mendeley":{"formattedCitation":"(Ashcraft and Schuermann, 2006)","manualFormatting":"Ashcraft & Schuermann (2006)","plainTextFormattedCitation":"(Ashcraft and Schuermann, 2006)","previouslyFormattedCitation":"(Ashcraft and Schuermann, 2006)"},"properties":{"noteIndex":0},"schema":"https://...