International Finance and Accounting Handbook

an active secondary market for home mortgages, the U.S. government established
Ginnie Mae to guaranty the mortgage pass-through securities of various Ginnie
Mae–approved private institutions. The Ginnie Mae guarantees created a readily
tradable mortgage-backed securities market because they were government backed
and guaranteed and accordingly carried AAA credit ratings.
The original Ginnie Mae transactions were followed by similar transactions of the
Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National
Mortgage Association (Fannie Mae) in the early 1980s. However, with time, in-
vestors wanted more diverse maturity products and cash flows, which led to the de-
velopment of CMOs (multiclass mortgage pass-throughs). The Tax Reform Act of
1986 allowed mortgage security pools to elect the tax status of a Real Estate Mort-
gage Investment Conduit (REMIC) and, since 1986, most mortgage securitizations
have been issued in REMIC form to create tax and accounting advantages for the is-
suers. The first nonmortgage securitization occurred in 1985 when Sperry Corpora-
tion securitized computer lease receivables, soon to be followed by the growth of the
asset-backed securities market. The growth of the public asset–backed securities
market is depicted in Exhibit 21.3.
As the market developed, various asset classes were securitized, such as credit
cards and home equity loans. Currently, any asset with a predictable cash flow can be
securitized. Exhibit 21.4 indicates the approximate percentage share that each asset
class represents out of the current public ABS market.

21.4 SECURITIZATION PROCESS. A securitization transaction typically starts with
an originator’s^1 decision to securitize its financial assets. The originator then selects
an underwriter and together they assemble the rest of the financing team. The under-

21.4 SECURITIZATION PROCESS 21 • 5

1985 $1.2 1997 $185.1

1988 $14.3 2000 $217.0

1991 $50.1 2001 $280.0

1994 $75.3 2002 $305.0 (estimated)

Source:The Bond Market Association.

Exhibit 21.3. Public Asset-Backed Market Volumes.

Home Equity 34% Student Loans 5%

Auto 31% Mfg. Housing 3%

Credit Cards 21% Leases 3%

Source:Dow Jones Interactive.

Exhibit 21.4. Public ABS by Asset Class.

(^1) An entity that originates financial assets (or purchases the financial assets from entities that originate
them) in the course of its business.