Academic journal article Federal Reserve Bulletin

Statement by Richard Spillenkothen, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, and Donald H. Wilson, Financial Markets Officer, Federal Reserve Bank of Chicago, before the Subcommittee on Policy, Research, and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 6, 1992

Academic journal article Federal Reserve Bulletin

Statement by Richard Spillenkothen, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, and Donald H. Wilson, Financial Markets Officer, Federal Reserve Bank of Chicago, before the Subcommittee on Policy, Research, and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 6, 1992

Article excerpt

Statement by Richard Spillenkothen, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, and Donald H. Wilson, Financial Markets Officer, Federal Reserve Bank of Chicago, before the Subcommittee on Policy, Research, and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, May 6, 1992

I am happy to be here today to discuss the securitization of commercial real estate loans and the related questions you raised in your letter of invitation, and I am most pleased that Mr. Donald Wilson of the Federal Reserve Bank of Chicago is with me. Mr. Wilson has worked extensively in the area of securitization and stands ready to help answer any questions you may have after my presentation.

To provide perspective, I will begin by reviewing the evolution and current state of the general asset-backed securities market. This review will be kept relatively brief because our colleague, Mr. Franklin Dreyer, of the Federal Reserve Bank of Chicago, presented an extended discussion on securitization when he appeared before this committee last summer.

In the beginning, government-guaranteed mortgages were placed in pools, and securities were issued that entitled the holders to the proceeds of the principal and interest payments that flowed from these mortgages. These securities were also guaranteed by the government. Nongovernment-guaranteed residential mortgages were also securitized, and most of the these securities were backed by government'sponsored agencies. Today more than $1 trillion worth of government-related mortgaged-backed securities are outstanding. Moreover, in the past decade or so the process of securitization has been extended to nonmortgage consumer loans such as automobile loans and credit card receivables. Securities that are backed by these assets are not guaranteed by the government but generally carry a credit enhancement provided by the private sector, and those securities account for a significant portion of the entire market. Furthermore, as I will discuss shortly, a limited volume of commercial real estate loans have been securitized in recent years without the benefit of government enhancement.

The range of terms available on securitized mortgage assets has also been greatly expanded over time. In particular, the innovations of collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) have resulted in securities that provide different claims and priorities on the principal and interest payments made on underlying loans, thus accommodating the various needs and preferences of investors.

This very impressive growth and development of securitized loans has occurred because of the benefits they provide to both issuers and investors. Originators of loans that sponsor assetbacked securities benefit from improved liquidity, enhanced fee income, and, to the extent that assets are removed from their balance sheets, less need for capital. Investors, on the other hand, acquire securities that require no management of the underlying loans on their part and yet provide an attractive return for instruments that pose, depending upon the nature of the credit enhancement, little or no credit risk. Furthermore, as I have noted, these securities increasingly have been structured to meet varying investor preferences for safety and predictability of cash flow and variability of values in relation to changes in interest rates. The importance of the safety and predictability of cash flow deserves to be given special emphasis because, to date at least, these qualities have been primarily responsible for the wide and deep attraction that assetbacked securities have had for various groups of investors.

Given the benefits provided by asset-backed securities, the Federal Reserve and other agencies that supervise insured depository institutions have viewed their development as very salutary. …

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