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Re-visiting UK mortgage master trust structures

William Howard Davies and Ganesh Rajendra Deutsche Bank

T he Northern Rock debacle brought the structural nuances of UK mortgage master trusts into greater scrutiny. The following chapter takes this opportunity to provide an overview of the typical structural template used in the UK prime mortgage securitisation market. UK master trust structures may have become highly intricate, may appear unwieldy and are certainly a complex challenge to understand fully; yet the multitude of structural features and triggers have one clear aim – the preservation of note holders’ principal, with a bias to senior bonds.

The basics The basic structure of a UK prime residential mortgage-backed securities (RMBS) master trust is theoretically relatively simple, with a revolving pool of mortgages that collateralises both the seller share and the funding share, which have a joint interest in the trust property. However, as any analysis of Northern Rock’s Granite trust will show, in reality the mortgage master trust is a complex template that is structured with numerous triggers that serve to capture the risks related to collateral, structure and seller, with breach of these covenants often triggering one or more requirements, such as ceasing trust replenishments, increasing reserve funds or switching to sequential payment of principal.

© Deutsche Bank

Before moving further, it is worth recapping on a number of terms. The investors’ or funding share is equivalent in value to all the RMBS tranches outstanding (less principal deficiency ledger (PDL) debit balances), the proceeds of which are used to purchase a portion of the receivables from the originator. The seller share is equivalent in size to total mortgage pool less funding share. The classification of individual tranches is by issuer (eg, RMBS deal), then by series (eg, three-year maturity), then by class (eg, rating) and lastly by individual tranche, which may be of a specific currency and coupon

Global Securitisation and Structured Finance 2008

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