Foreign Exposure to Asset-Backed Securities of U.S. Origin

[gopbuster]

Here is a .pdf paper from the Federal Reserve that has some good explanations and definitions of the structure and different types of derivatives as well as what THEY say is the foreign exposure to the chain of derivatives.

International Finance Discussion Papers
Number 939
August 2008
Foreign Exposure to Asset-Backed Securities of U.S. Origin


snip

X. Conclusion
This paper develops a conceptual framework for understanding foreign exposure
to U.S. assets and attempts to measure three concepts of exposure. We then use these
measures to construct expected mark-to-market losses and ultimate losses to foreigners.
When predicting ultimate losses, we apply hypothetical default rates to our net foreign
exposure measure, which ensures that each dollar of underlying U.S. assets can generate,
at most, one dollar of loss. In a hypothetical scenario with a 20 percent default rate on
nonconforming mortgages and a 10 percent default rate on other types of underlying
loans (with a 50 percent recovery rate for each), we predict that foreigners would
ultimately lose $75 billion on their holdings of ABS backed by U.S. assets. Then again,
the mark-to-market losses stemming from a price markdown in all foreign-held ABS can
be as much as six times larger using a 20 percent price markdown. Mark-to-market
losses are so much greater for three reasons: They sum the markdowns of all entities in
the securitization chain, they include illiquidity discounts, and those discounts can be
amplified along the securitization chain when there is uncertainty and lack of
transparency.
Finally, this paper began by alluding to the perception that foreigners hold a
disproportionate share of exposure to U.S. MBS. We find that this is not the case;
however, there are several dimensions to consider. First, foreigners hold about
39 percent of outstanding ABS backed by U.S. assets, including securities of U.S. origin
repackaged abroad (table 6, line 2). Therefore, foreigners will bear 39 percent of any
mark-to-market markdowns associated with those securities. This percentage is
somewhat larger than the foreign share of holdings of other U.S. credit securities
(Treasury securities, agency securities, and corporate bonds), which is about 28 percent
(table 3, lines 3, 4, and 5). However, these other credit market securities mainly represent
only one level of securitization, whereas the ABS market is characterized by a multiple
securitization of the same underlying loan. Netting out the repackaging, foreigners are
exposed, on net, to only about 22 percent of securitized loans of U.S. origin, either
directly in the form of underlying loans or indirectly through securities (table 6, line 5,
third column). In particular, it is the repackaging abroad of ABS of U.S. origin as well as
foreign holdings of these repackaged securities that explains why foreigners’ share of
17
ultimate losses on securitized loans (table 6, line 5, sixth column) is considerably lower
than their share of mark-to-market losses.26
It is true that among ABS, foreigners disproportionately hold residential MBS
(table 6, lines 6 and 7), which may incur more ultimate losses relative to other types of
ABS. Nonetheless, foreigners’ net share of securitized nonconforming residential
mortgages is still just 29 percent, nearly comparable to their 28 percent holdings of
Treasury securities, agency securities, and corporate bonds noted above. Foreigners’ 12
percent share of other types of securitized credit, such as commercial mortgages or
consumer loans (line 7), appears low in comparison.
Finally, we have only considered the portions of the U.S. mortgage and consumer
loan markets that were securitized. A substantial fraction of mortgages and consumer
loans are never securitized, and we find no evidence that foreign residents hold any of
these unsecuritized loans. One could be concerned with how much of the whole U.S.
mortgage and consumer debt markets, and their losses, foreigners are exposed to, on net.
Of the approximately $10.1 trillion (table 6, line 4) in outstanding U.S. mortgage and
consumer debt (excluding conforming mortgages), foreigners have net exposure of
$835 billion from the securitized portion (line 5) and none from the unsecuritized (line 8).
Therefore, foreigners’ net exposure is 8 percent of these debt markets (this is a weighted
average of 15 percent for nonconforming residential mortgages and 3 percent for
commercial mortgages and consumer debt). In comparison, table 3 (line 2) shows that
foreigners hold about 16 percent of all U.S. credit market instruments, which includes all
loans.27 Therefore, foreign net exposure to U.S. mortgage and consumer credit markets is
similar or undersized relative to other credit holdings. As a final caution to the reader,
recall that all of our estimates, like other analyses, exclude the effect of derivatives and
other off-balance-sheet items as well as contingent or implicit support that may be
provided to ABS issuers by their bank sponsors.


more and its looooong.........http://www.federalreserve.gov/pubs/ifdp/2008/939/ifdp939.pdf